Reforms to the insurance sector in India: the wait continues

by DLA Piper

The winter session of the India parliament concluded on December 20,2013. Against the backdrop of the slowing growth rate and demands from the investment community for economic reforms, one critical piece of legislation that was expected to be considered by the parliament was The Insurance Laws (Amendment) Bill, 2008 (the "Bill"). The government’s approval to increase the foreign direct investment limit for the insurance sector from 26 per cent. to 49 per cent. had also given rise to the expectation that the Bill would be passed at the winter session of the parliament.

In 2004, the Law Commission recommended a comprehensive reform of the Insurance Act, 1938 (the “Insurance Act”). In 2005, the Narasimhan Committee made further recommendations for changes to the Insurance Act. The Bill, which amends the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972 and the Insurance Regulatory and Development Authority ("IRDA") Act, 1999 and incorporates the recommendations of the Law Commission and the Narasimhan Committee has been up for consideration by the parliament since 2008.

Lack of political consensus has led to yet another hiatus in the passage of the Bill into law. Had the Bill been passed at the recently concluded session of parliament, it may perhaps have reinforced the message to the global investment community that economic reforms are underway.


  • Increased foreign investment: The bill proposes an increase in the foreign investment ceiling from 26 per cent to 49 per cent.
  • Capital raising: The Bill provides for general insurance companies to raise funds from the capital markets with the permission of the government. Under the current laws, insurance companies may raise only equity share capital.
  • Lloyd's, the society of underwriters based in London is to be allowed to do business in India through joint ventures through Indian partners and to act as reinsurers through their branches in India. Since Lloyds is not a company but an insurance market, further clarity is needed as to whether the intention is to allow individual members to operate in the country.
  • Special Economic Zone ("SEZ"): The Bill proposes to allow foreign insurers to operate in SEZs without regulatory control but allows the government in its discretion to allow any of the provisions of the Insurance Act to be applicable to such insurers.


The Bill also proposes, amongst others, to provide greater protection to the insured by imposing penalties to those insurers who fail to meet their obligations with respect to underwriting third party motor insurance or other insurance policies in rural sectors and allows for the partial assignment of insurance policies. The Bill also does away with the existing requirement for Indian promoters of an insurance company to reduce their stake to 26 per cent. over a period of ten years.


Currently, there are 52 insurance companies operating in India. Out of these 52 companies, 1 is in the reinsurance business, 24 are in the life insurance business and 27 are in the non-life insurance business. The General Insurance Corporation is the sole national reinsurer in the country. Insurance penetration (measured as a ratio of the premium to the GDP) and insurance density (measured as a ratio of the premium to the total population) in India has been at significantly low levels in India compared to its peers in Asia. As of 2011, insurance penetration in the life insurance sector was 3.40 percent, whereas the penetration in the non-life insurance sector was in the range of 0.55 per cent. to 0.75 per cent. Insurance density as of 2011 was USD 49.0 for the life insurance sector and USD 10.0 in the non-life sector. The measure of insurance penetration and insurance density reflects the level of development of the insurance sector in a country. These low penetration levels suggest that the insurance sector in India has a promising potential for growth. Additionally, a rising population, a growing economy, increased domestic savings and greater awareness of insurance products are positive indicators for growth for the insurance industry.

The insurance industry in India does appear to be at a crossroad. A regulatory environment which is perceived to be discouraging to innovation and competitiveness has stifled the ability of insurance companies to remain profitable and seek ways to increase their product offerings. It is prescient that the IRDA in its annual report stated that "Since the opening up of the Indian insurance sector for private participation in 1999, India has reported an increase in insurance density for every subsequent year and for the first time reported a fall in the year 2011."


Indication that the government is focused on reforms: The passing of the Bill in parliament would be an important reinforcement to the foreign investment community of India's commitment to financial and economic reforms. It is important for the global business community to perceive India as a safe harbor for their capital.

Address capital requirements: The insurance business is a capital intensive business. The IRDA estimates that if insurance companies are to improve insurance penetration and introduce new products and improve distribution networks while maintaining and increasing their customer base, they will need approximately 612 billion rupees. With a raise in the investment ceiling to 49 per cent., the insurance sector would be able to raise much needed capital to grow and improve the value proposition to end customers and operational performance. Increasing the ceiling for investment in the insurance sector is the best way to meet additional capital requirements. Also, like water seeking its own level, any delay in the passage and implementation of the Bill may also result in capital moving to other competitive markets.

Prospects for growth: India is expected to have a working population of 795.5 million by the year 2026. Additionally, increasing incomes would also lead to greater disposable incomes which are often the target of financial service providers like insurance companies. Also, as the population becomes more financially literate, their appreciation of the benefits of insurance would be enhanced. With the wider participation of foreign insurers in the Indian insurance industry, the potential for growth in the insurance sector be realized to a greater degree.

Infrastructure investment: Another persuasive argument for the Bill to be passed is the need for investment in the infrastructure sector. Infrastructure or its lack thereof is frequently cited as one of the biggest hurdles to doing business in India. India's planning commission has projected a doubling of infrastructure investment to $1,025 billion in the 12th Five Year Plan (2012-2017). The government has set of target of $500 billion in infrastructure spending from the private sector. It is widely anticipated that the reforms to the insurance sector once implemented would result in more capital flow into the country which would lead to more investments by insurance companies in the infrastructure sector. The Bill also complements the relaxations which the IRDA had effected to allow insurers to invest in the infrastructure sector.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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