Insurance Bill (Amendment) – 2023

Insurance in India was introduced by the establishment of the Oriental Life Insurance Company in Calcutta in the year 1818. The first insurance company was regulated by the British and was according to British laws. In the years following India’s independence, an insurance regulator and Development Authority for India (IRDAI) was set up to manage the operations of insurance and development activities within India. IRDAI became an official body in April of 2000, with the primary goals to encourage competition and thus improve customer satisfaction through increased customer choice and lower rates. Later, in August 2000, IRDA opened the Indian market by allowing foreign players to operate in the Indian market on a Joint venture basis. Foreign firms were allowed to own up to 26% of any Indian firm or open a Joint venture with an Indian entity. A few years later, IRDAI raised the foreign firms’ holding limit to 74%, allowing the foreign firms to become majority shareholders. For insurance intermediaries such as brokerages and others, 100% foreign investment was allowed.

This move by IRDA to allow foreign insurance companies to enter into a Joint venture with Indian firms benefited the Indian firms immensely as the foreign firms have the “know-how” knowledge to underwrite the risks. Since Indian companies were new to the insurance market, which requires past data to forecast the future, which was not readily available with the Indian insurers, a Joint venture with foreign firms gave a kick-start. The Union Government has now decided to make amendments to the Insurance Law, 2023, which are expected to be approved in 2024 after the general body elections.

Here are the Proposed Changes in Insurance Amendment Law, 2023:

Proposed Changes:

• The law proposes to reduce the minimum capital requirements to set up an insurance company in India. Currently, the law requires the minimum capital requirement of Rs.100 Crore for life, general and health insurance firms and Rs.200 Crore for reinsurance businesses. This move would enable higher participation and entry of new players into the market, increasing the competition and benefiting the customers as small companies can enter the market with innovative products and competitive premiums.

• The insurers are divided into 3 classes: Life, Non-life and Re-insurers. Non-life is further classified as general insurers as well as separate health insurance. Each of these classes cannot underwrite the business of the other class, meaning life insurance cannot underwrite non-life and reinsurance businesses and vice versa. The new insurance law proposes introducing composite insurance companies where an insurer can offer both life and non-life solutions to the customers without requiring different licenses for both. It would immensely benefit the policyholders as they could get complete coverage in one policy and from one insurer. If the proposed legislation is adopted and approved, there will be an increase in the solving margin and capital requirement for these businesses. Currently, the solvency margin stands at 150% or 1.5 times the paid-up capital, which is Rs.100 Crore as per the existing law.

• The amendment proposes allowing industrial houses to start their own insurance companies that cater to their needs. These kinds of insurance companies could be known as captive insurers, which will provide greater control over the industrial houses’ insurance coverage and ensure tailor-made products to suit their needs. For instance, it is difficult to obtain a fire insurance policy for firms dealing with combustible products as they come with many restrictions and the wording is standard for all establishments. Motor insurance was traditionally designed to cover the Internal combustion engines, but even with the introduction of Electric vehicles, the wording seems the same. The definition of an engine does not apply to that of electric vehicles, which do not have an internal combustion engine. Therefore, the engine protection cover is referred to as battery protection.

• Companies offering health insurance can offer services and products related to health better to their clients through collaboration with health professionals. This would help the insurance companies launch high-quality and value-added healthcare services. Insurance companies can now offer healthcare services such as virtual consultation, unlimited access to doctors, medicines, diagnostics and specialist consultation etc., included in the insurance policy. For instance, insurance companies in developed countries provide medicines for certain diseases under the health insurance plan, which could also be implemented in India.

Probable Implications:

• The first proposal, which discusses reducing the capital requirements from the existing Rs.100/200 Crore, might come back to haunt the insurance market in case of a pandemic. For instance, this capital requirement is intended to ensure the insurance company has enough funds in case of liquidation. Still, with the reduced capital requirement, only some companies might find it difficult to settle their claims in case of a catastrophic event such as Floods, Earthquakes etc. This would be particularly difficult for regional-level players operating in a particular market. 

• The second proposal is to provide composite licenses so insurance companies can sell life and non-life insurance products. This move might be useful as well as painful to the customers. For example, suppose life and non-life insurance are offered in a single policy. In that case, if the insured customer is not satisfied with the service of any one product, he/she may not be able to port it to the other insurer. Here, the porting process might become difficult as the other insurer should have a similar product and acceptability. Reducing the solvency ratio could also deter the insurance industry, as this ratio is important for the company to settle the claims in the future.

• Captive insurers’ concept may sound reasonable, but we should remember that insurance works based on the “law of large numbers ‘. Increasing the number of insured individuals or assets improves insurance effectiveness, but reducing participants in the insurance pool can lead to higher loss ratios due to reduced risk diversification. On the one hand, captive insurers make sure that the industrial houses act as if they are insurers by maintaining adequate risk management solutions in place, whereas on the other hand, it would increase their loss ratio with less numbers being insured.

• Health insurance companies providing healthcare services such as medicines, virtual consultation, unlimited access to doctors etc., may increase the health insurance premiums. The premium increase would be passed on to all the customers in the market as the loss ratios would increase due to the high claim payouts.

All in all, while these moves seem great on paper, how they are implemented would decide how they shape the insurance industry.

For comprehensive advice on your insurance plan, please visit Ethika Insurance Broking to talk to our insurance experts.