Insurance, which finds mention in Manusmriti and Yajnavalkya of Manu and Kautilya's Arthashastra as pooling of resources for redistribution after fire, floods, epidemics and famine, is a legal agreement between two parties that include the insurance company (insurer) and individual (insured). The insurer promises to compensate losses of the insured due to death or damage of properties against payment of premium. "The Indian insurance market is a huge business opportunity waiting to be tapped with its global market share of 1.92% (2.61% share is in the life insurance segment). India ranks 10th among 88 global markets, says a study by the Swiss Re Group which is a global insurance player. Interestingly, after Hurricane Harvey disrupted lives in Houston, USA in 2017, insurance companies had used drones to survey the affected areas to speed up claims process.
Growth: The life-insurance business began in 1818 with establishment of Oriental Life Insurance Company in Calcutta, which failed in 1834. In 1829, Madras Equitable began life-insurance business in Madras Presidency. The British Insurance Act was enacted in 1870 followed by Bombay Mutual (1871) and Oriental (1874) while the Empire of India was founded in Bombay Presidency in 1897 and the era was dominated by British companies. The Government of India began publishing returns of insurance companies in 1914, passed Indian Life Insurance Companies Act in 1912; enacted Indian Insurance Companies Act in 1928 followed by amendment of the Insurance Act in 1938. An ordinance on 19.01.56 nationalized the insurance industry. Of the total 24 life insurance companies operating in India now, Life Insurance Corporation of India (LIC), founded on 01.09.1956 by merging 154 Indian, 16 non-Indian insurers and 75 provident societies, is the only public sector undertaking while rest are private companies. The LIC had a monopoly until late 1990s, when the insurance industry was opened to private sector.
Former RBI governor R. N. Malhotra's 1994 report recommended entry of private sector including foreign companies as joint ventures with Indian partners. This led to formation of Insurance Regulatory and Development Authority (IRDA) in 1999 (its headquarters are at Hyderabad now) as a statutory body to regulate and promote insurance sector. It opened up insurance market in August 2000 allowing ownership up to 26%. The IRDAI in 2013 raised foreign direct investment limit to 49% and Union Budget-2019 raised it to 100%.
The insurance industry is critical to economic growth of a country. It boosts risk taking while securing growth. However, Indian insurance market's penetration into the population is abysmally low despite its dynamic growth. With a population of over 1.35 billion, 2nd only to China, India is expected to be the most populous nation by 2030. The country's GDP in 2019-20 grew by 4.2% against 6.1% in 2018-19, (weakest since 2013) according to National Statistical Office data. The RBI governor Shaktikanta Das on 22.05.2020 said that the COVID-19 pandemic is likely lead to contract GDP in FY2020-21. Just about a month ago, International Monetary Fund had projected India's GDP growth to be 1.9%.
The insurance industry is critical to economic growth of a country. It boosts risk taking while securing growth
India's insurance industry has 57 companies, (24 life insurance and 33 non-life insurers) now. The gross premiums of life insurance companies increased from Rs 2.56 trillion in 2012 fiscal year (FY) to Rs 7.31 trillion in FY 2020 due to new business worth Rs 2.13 trillion. Overall insurance penetration (premiums as per cent of GDP) reached 3.69% in 2017 from 2.71% in 2001. However, private life insurance players had a market share of 31.3% in new business in FY20 while market share of private non-life insurance companies rose from 15% in FY2004 to 56% till April 2020.
Major government initiatives: Enrollments under the Pradhan Mantri Suraksha Bima Yojana (PMSBY) reached 154.7 million till December 2019 since its launch on 09.05.15 and over 53.8 million farmers benefitted from PMFBY in FY20; Axis Bank acquired an additional 29% stake in Max Life Insurance in April 2020; in November 2019, Airtel partnered with Bharti AXA Life to launch prepaid bundle with insurance cover and in Sept 2018, National Health Protection Scheme had launched under Ayushman Bharat (with Rs 500,000) to cover more than 100 million vulnerable families.
It is expected that health insurance penetration shall deepen from 34% to 50%. The IRDAI plans to issue redesigned initial public offering (IPO) guidelines for insurance companies that are interested to divest equity through the IPO route with provision for insurers to invest up to 10% in additional Tier-1 bonds issued by banks to augment their Tier-1 capital. This is envisaged to expand the pool of eligible investors. However, the Centre's decision to open up the insurance industry to private and foreign players was prudent as the LIC not only had a prolonged monopoly but its returns have been poor in comparison to other companies.
Demographic factors, like growing middle class, young insurable population and growing awareness for security and retirement plans would aid a steady growth of life insurance. Moreover, several changes in regulatory frameworks could be expected to catapult pragmatic changes for insurers to conduct business.India's insurance industry post-liberalization has recorded a significant growth while gross premium collection by insurance companies is likely to reach US$ 280 billion by 2020. The life insurance industry is expected to increase by 14-15% annually for the next three to five years.