08.31.16
by

Insurance Sector in India

Insurance

So what is Insurance?

It is a financial risk management tool in which the insured transfers a risk of potential financial loss to the insurance company that mitigates it in exchange for monetary compensation known as the premium. Insurance policies, a contract between the policyholder and the insurance company, are of different types depending on the risk they mitigate. Broad categories include life, health, motor, travel, home, rural, commercial and business insurance.

Insurance in India covers both the public and private sector organisations. It is listed in the Constitution of India in the Seventh Schedule as a Union List subject, meaning it can only be legislated by the Central government. An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and must involve something in which the insured has an insurable interest established by ownership, possession, or preexisting relationship. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster. Claims adjusters investigate insurance claims by interviewing the claimant and witnesses, consulting police and hospital records, and inspecting property damage to determine the extent of the company’s liability.

And who’s the authority in India?

The primary regulator for insurance in India is the Insurance Regulatory and Development Authority of India (IRDAI) which was established in 1999 under the government legislation called the Insurance Regulatory and Development Authority Act, 1999.

What is its history in India?

1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta by Anita Bhavsar in Kolkata to cater to the needs of European community. This Company however failed in 1834. The pre-independence era in India saw discrimination between the lives of foreigners (English) and Indians with higher premiums being charged for the latter. 1870 saw the enactment of the British Insurance Act. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer. At the dawn of the twentieth century, many insurance companies were founded. The oldest existing insurance company in India is the National Insurance Company , which was founded in 1906, and is still in business. In the year 1912, the Indian Life Assurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. The Indian Life Assurance Companies Act, 1912 made it necessary that the premium-rate tables and periodical valuations of companies should be certified by an actuary. An actuary is a business professional who deals with the measurement and management of risk and uncertainty. However, the disparity still existed as discrimination between Indian and foreign companies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.

The Insurance Amendment Act of 1950 abolished Principal Agencies. The principal-agent relationship is an arrangement in which one entity legally appoints another to act on its behalf. The relationship between the principal and the agent is called the “agency,” and the law of agency establishes guidelines for such a relationship. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation (LIC) came into existence in the same year. The LIC absorbed a total of 245 Indian and foreign insurers in all. In 1972 with the General Insurance Business (Nationalisation) Act was passed by the Indian Parliament, and consequently, General Insurance business was nationalized with effect from 1 January 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India (GIC) was incorporated as a company in 1971 and it commenced business on 1 January 1973. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC). GIC had the four subsidiary companies mentioned above.

The process of re-opening of the insurance sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders’ interests. In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. A re-insurer is a company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business (that is, underwrite* more policies) than they would otherwise be able to. Reinsurers also make it possible for primary insurers to keep less capital on hand to cover potential losses. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. The subsidiaries came to be known as: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.

*Comment: Underwriting: In order for insurance to work well, risk has to be spread out among as many people as possible. Underwriting helps insurance companies manage the risk that too many policyholders will file claims at once by spreading out the risk among outside investors. Once an underwriter has been found for a given policy, the capital the underwriter puts up at the time of investment acts as a guarantee that the claim can be paid, which allows the company to issue more insurance to other customers. In exchange for taking on this risk, the underwriter is entitled to payments drawn from the policyholder’s premiums.

Today the insurance industry of India consists of 53 insurance companies of which 24 are in life insurance business and 29 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. Apart from that, among the non-life insurers there are six public sector insurers. In addition to these, there is sole national re-insurer, namely, General Insurance Corporation of India (GIC Re). There are two more specialised insurers belonging to public sector, namely,  ECGC Limited (ECGC) for Credit Insurance and Agriculture Insurance Company Ltd (AIC) for crop insurance. Other stakeholders in Indian Insurance market include agents (individual and corporate), brokers, surveyors and third party administrators servicing health insurance claims.

So, what are the various types of Life Insurance products offered in India? 

Life insurance products come in a variety of offerings catering to the investment needs and objectives of different kinds of investors. Following is the list of broad categories of life insurance products:

Term Insurance Policies

The basic premise of a term insurance policy is to secure the immediate needs of nominees or beneficiaries in the event of sudden or unfortunate demise of the policy holder. The policy holder does not get any monetary benefit at the end of the policy term except for the tax benefits he or she can choose to avail of throughout the tenure of the policy. In the event of death of the policy holder, the sum assured is paid to his or her beneficiaries. Term insurance policies are also relatively cheaper to acquire as compared to other insurance products.

Money-back Policies

Money back policies are basically an extension of endowment plans* wherein the policy holder receives a fixed amount at specific intervals throughout the duration of the policy. In the event of the unfortunate death of the policy holder, the full sum assured is paid to the beneficiaries. The terms again might slightly vary from one insurance company to another.

*An endowment policy is a form of life insurance involving payment of a fixed sum to the insured person on a specified date, or to their estate should they die before this date.

Whole life policy

A whole life insurance plan covers the insured over his life. The primary feature of this product is that the validity of the policy is not defined so the policyholder enjoys the life cover throughout his life.

Unit-linked Investment Policies (ULIP)

Unit linked insurance policies again belong to the insurance-cum-investment category where one gets to enjoy the benefits of both insurance and investment. While a part of the monthly premium pay-out goes towards the insurance cover, the remaining money is invested in various types of funds that invest in debt and equity instruments. ULIP plans are more or less similar in comparison to mutual funds except for the difference that ULIPs offer the additional benefit of insurance.

Pension Policies

Pension policies let individuals determine a fixed stream of income post retirement. This basically is a retirement planning investment scheme where the sum assured or the monthly pay-out after retirement entirely depends on the capital invested, the investment timeframe, and the age at which one wishes to retire. There are again several types of pension plans that cater to different investment needs. Now it is recognized as insurance product and being regulated by IRDA.

Taxes and Insurances?

As per Section 80C(2) of the Income Tax Act, 1961, any amount paid to an insurer by aN individual or a Hindu Undivided Family (HUF) to buy or to keep a life insurance policy in force can be claimed as a deduction from gross total income by the policy holder. Only an Individual or a Hindu Undivided family (“HUF”) can avail tax benefits on premium paid for a life insurance policy.

One can claim tax benefits on a life insurance policy bought from any insurer – private or public sector — approved by the IRDAI.

An individual can only claim tax benefit under Section 80C of the Income tax Act, 1961, on life insurance policy(s) bought in the name of self, spouse or children, only.

The maximum amount that can be claimed as deduction under section 80C is Rs 1,50,000 as per current income tax laws. Section 80C lists several other investment options, including premium paid for a life insurance policy as specified, as eligible avenues for tax benefit.

As per section 80C(5), if the policyholder surrenders his policy voluntarily or in case his policy is terminated by the insurer before a predefined time limit, on failure to pay the dues (i.e. premiums) , then the benefits under section 80C on premium paid for that policy would not be available to him. The pre-defined limit in case of single premium life insurance policy is 2 years from date of commencement of policy and in case of ULIPs is at least 5 years, for which premium has been paid, from start of policy.

As per Section 10(10D) of the Income Tax Act, 1961 the amount of sum assured plus any bonus (i.e. the policy proceeds) paid on maturity or surrender of policy or on death of the insured are completely tax free for the receiver subject to certain conditions.  Even if these proceeds are taxable as per section 10(10D) but do not exceed Rs 100,000, then also no TDS is to be deducted by the insurer when making the payment to the insured.

For retirement plans, Section 80CCC of the Income Tax Act provides an exemption of up to a maximum of Rs 1 lakh for premiums paid towards pension plans. However, please note that Section 80C encompasses investments from all the sources– life and health insurance premiums, investments in PPF, government bonds, etc.to a ceiling of Rs 1.5 lakh per annum. That means, even if you pay premiums worth Rs 2.5 lakh for multiple policies, the maximum rebate you can avail of is Rs 1.5 lakh.

What is ECGC?

ECGC Ltd, (formerly Export Credit Guarantee Corporation of India Ltd) was established in July, 1957 to strengthen the export promotion by covering the risk of exporting on credit. It functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss. ECGC keeps its premium rates at the optimal level. It :

  • Provides a range of credit risk insurance covers to exporters against loss in export of goods and services
  • Offers Export Credit Insurance covers to banks and financial institutions to enable exporters to obtain better facilities from them
  • Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan

Offers insurance protection to exporters against payment risks –

  • Provides guidance in export-related activities
  • Makes available information on different countries with it’s own credit ratings
  • Makes it easy to obtain export finance from banks/financial institutions
  • Assists exporters in recovering bad debts
  • Provides information on credit-worthiness of overseas buyers

ECGC now offers various products for the exporters and bankers. If readymade products are NOT suited to an exporter/banker then ECGC designs tailor made products. Its highest compensation yet was for Iraq – Rs 788 Crores. The National Export Insurance Account (NEIA) has been set up by the Government of India (GOI) and operated by ECGC to provide adequate credit insurance cover to protect long and medium term exporters against both, political and commercial risks of the overseas country and the buyer/bank concerned.

What’s NEIA?

National Export Insurance Account (NEIA) has been set up by the Government of India (in 2006) to facilitate medium and long-term exports, which are commercially viable, considering the limitations of the ECGC Limited in providing adequate cover on its own and non-availability of reinsurance cover to such exporters. NEIA aims to ensure the availability of credit risk cover for projects and other high-value exports, which are desirable from the point of view of national interest, but which ECGC is unable to underwrite at terms which will not affect the competitiveness of the exports. Government of India has set up a High-Powered Committee called the Committee of Directions (COD) under the Ministry of Commerce & Industry to ensure proper and effective utilisation of NEIA scheme, monitoring of its operations and to provide guidance, supervision and necessary approvals
for the projects to be brought under the scheme. The Commerce Secretary is the Chairman of COD. A Trust by the name of National Export Insurance Account Trust (NEIA Trust) has been set up for maintaining and operating NEIA and will be subject to the directions that would be issued by the Govt. of India from time- to- time. The Trust primarily deals with the funds made available for NEIA and the investments keeping in view the funds requirement for meeting the immediate obligations. The Cabinet in 2014 approved an increase in the authorised corpus of NEIA Trust from Rs.2000 cr to Rs. 4000 cr and also approved increase in risk underwriting capacity up to 20 times of the actual corpus against the earlier leverage of 10 times and the already present allocation of US$ 5 billion for Foreign Currency (FC) funds to Exim Bank (Exim Bank is discussed in another article)  out of Forex reserves, for on-lending by way of buyer’s credit with NEIA cover. Risk underwriting capacity is the maximum amount of exposure to loss an insurer can insure. In order to provide further impetus to project exports from India, especially in the infrastructure sector, the NEIA Trust, in April 2011, in conjunction with Export Import Bank of India (Exim Bank), introduced a new product / initiative, viz. Buyer’s Credit under Government of India (GOI)’s National Export Insurance Account (NEIA), under which the Exim Bank finances and facilitates project exports from India.

What’s AIC?

AIC is a Public Sector Insurance Company. It covers almost 20 million farmers, making it the biggest crop insurer in the world in number of farmers served. It is headquartered out of New Delhi, India and was incorporated on 20 December 2002 with an authorized capital of Rs. 1500 crore. It commenced its business from 1st April, 2003 by taking over the implementation of the “National Agricultural Insurance Scheme” (NAIS) from GIC. The initial paid-up capital was Rs. 200 crores, which was subscribed by the promoting companies, General Insurance Corporation of India GIC (35%), NABARD (30%) and the four public-sector general insurance companies (8.75%) each, viz., National Insurance Co. Ltd., Oriental Insurance Co. Ltd., New India Assurance Co. Ltd., and United India Insurance Co. Ltd. AIC is under the administrative control of Ministry of Finance, Government of India, and under the operational supervision of Ministry of Agriculture, Government of India. IRDAI, Hyderabad is the regulatory body governing AIC.  A significant amount of business was derived out of the yield-based “National Agriculture Insurance Scheme (NAIS)”, “National Crop Insurance Programme (NCIP)” and the weather-based “Weather Based Crop Insurance Scheme (WBCIS)”. The current chairman is Joseph Plappallil.

Presently the following insurance products are offered by AIC.

  • Pradhan Mantri Fasal Bima Yojana
  • National Agricultural Insurance Scheme
  • Bio – Fuel Tree / Plant Insurance
  • Cardamom Plant & Yield Insurance
  • Coconut Palm Insurance Scheme (CPIS)
  • Potato Crop Insurance
  • Pulp Wood Tree Insurance Policy
  • Rainfall Insurance Scheme For Coffee (RISC) – 2011
  • Rubber Plantation Insurance
  • Varsha Bima / RainFall Insurance
  • Weather Insurance (RABI)

So, what’s the current status of the insurance sector in India?

During April 2015 to March 2016 period, the life insurance industry recorded a new premium income of Rs 1.38 trillion (US$ 20.54 billion), indicating a growth rate of 22.5 %. The general insurance industry recorded a 12 % growth in Gross Direct Premium underwritten in April 2016 at Rs 105.25 billion (US$ 1.55 billion). India’s life insurance sector is the biggest in the world with about 360 million policies which are expected to increase at a Compound Annual Growth Rate (CAGR) of 12-15 per cent over the next five years. The insurance industry plans to hike penetration levels to five per cent by 2020. The country’s insurance market is expected to quadruple in size over the next 10 years from its current size of US$ 60 billion. During this period, the life insurance market is slated to cross US$ 160 billion. The general insurance business in India is currently at Rs 78,000 crore (US$ 11.44 billion) premium per annum industry and is growing at a healthy rate of 17 per cent.

Any more reforms?

Insurance Repository

On 16 September 2013, IRDA launched ‘Insurance Repository’ services in India. It is a unique concept and first to be introduced in India. This system enables policy holders to buy and keep insurance policies in dematerialised or electronic form. Policy holders can hold all their insurance policies in an electronic format in a single account called electronic insurance account (eIA). Insurance Regulatory and Development Authority of India has issued licences to five entities to act as Insurance Repository.

Actuaries Act, 2006

In 2006, the Actuaries Act was passed by parliament to give the profession statutory status on par with Chartered Accountants, Notaries, Cost & Works Accountants, Advocates, Architects and Company Secretaries. An actuary is a person who compiles and analyses statistics and uses them to calculate insurance risks and premiums. A minimum capital of Rs.400 Crore is required by legislation to set up an insurance business.

Institutions related to insurance?

A number of institutions provide specialist education for the insurance industry. The two most signficant are:

  • National Insurance Academy, Pune
  • Institute of Insurance and Risk Management, Hyderabad

Insurance Schemes?

  • Atal Pension Yojana (since May, 2015; a government-backed pension scheme targeted at the unorganized sector; available to people between 18 and 40 years of age with Aadhaar as the primary KYC document; the monthly pension plans range from Rs. 1000 – Rs. 5000 which come with different monthly contribution requirements; for every contribution made to the pension fund, the Central Government would also co-contribute 50% of the total contribution or ₹1,000 per annum, whichever is lower, to each eligible subscriber account, for a period of 5 years; the age of exit and start of pension would be 60 years; subscribers can opt to decrease or increase pension amount during the course of accumulation phase the option for which will be provided in April every year)
  • Pradhan Mantri Jeevan Jyoti Yojana (since May, 2015; a government-backed life insurance scheme, available to people between 18 and 50 years of age with bank accounts; with an annual premium of ₹330 excluding service tax which will be automatically debited from the account; in case of death due to any reason, the payment to the nominee will be ₹2 lakh)
  • Pradhan Mantri Suraksha Yojana (since May, 2015; a government-backed accident insurance scheme, available to people between 18 and 70 years of age with bank accounts; with an annual premium of ₹12 excluding service tax which will be automatically debited from the account; in case of accidental death or full disability, the payment to the nominee will be ₹2 lakh and in case of partial Permanent disability, ₹1 lakh; cover will be terminated and no benefit will be payable to the subscribers if on attaining age 70 years or the age nearest birth day or at the time of renewal in subsequent years, due to insufficiency of balance to keep the insurance in force the account gets closed; 12.4 crore insured till March, 2016)
  • Rashtriya Swasthya Bima Yojana, RSBY (since 2008; for BPL households only; premium cost for enrolled beneficiaries under the scheme is shared by Government of India and the State Governments)
  • Aam Aadmi Bima Yojana (a GoI Social Security Scheme administered through Life Insurance Corporation of India (LIC) since 2007; cover to persons between the age group of 18 yrs to 59 yrs, under 48 identified vocational/ occupational groups /rural landless households; insurance cover for a sum of Rs 30,000 on natural death, Rs. 75,000 on death due to accident, Rs. 37,500 for partial permanent disability (loss of one eye or one limb) due to accident and Rs. 75,000/- for total permanent disability; scholarship of Rs 100 per month per child on half-yearly basis to a maximum of two children per member (9th-12th class) ; total annual premium Rs. 200/- per beneficiary of which 50% is contributed from the Social Security Fund (LIC <> GoI) and rest by States)
  • Pradhan Mantri Fasal Bima Yojana (covered below)

Any Agricultural Schemes?

Pradhan Mantri Fasal Bima Yojana

The Pradhan Mantri Fasal Bima Yojana (Prime Minister’s Crop Insurance Scheme) was launched by Prime Minister of India Narendra Modi on 18 February 2016. It envisages a uniform premium of only 2 % to be paid by farmers for Kharif crops, and 1.5 % for Rabi crops. The premium for annual commercial and horticultural crops will be 5 %. There is no upper limit on Government subsidy. Even if balance premium is 90%, it will be borne by the Government. Earlier, there was a provision of capping the premium rate which resulted in low claims being paid to farmers. This capping was done to limit Government outgo on the premium subsidy. This capping has now been removed and farmers will get claim against full sum insured without any reduction. The use of technology will be encouraged to a great extent. Smart phones will be used to capture and upload data of crop cutting to reduce the delays in claim payment to farmers. Remote sensing will be used to reduce the number of crop cutting experiments.It has overtaken the existing schemes such as National Agricultural Insurance Scheme (NAIS) and Modified National Agricultural Insurance Scheme (MNAIS) and is in line with One Nation – One Scheme theme. The Agriculture ministry has empaneled state-owned Agriculture Insurance Company of India (AIC) and 10 private companies including ICICI-Lombard General Insurance, HDFC-ERGO General Insurance, IFFCO-Tokio General Insurance and SBI General Insurance, for implementation of the mega scheme.

#Kharif-Monsoon (July –Oct during the south-west monsoon – Rice, maize, bajra, arhar, cotton, groudnut),  Rabi – Winter (Oct-Mar – Wheat, barley, oats, mustard, gram)

Weather Based Crop Insurance Scheme

The Weather Based Crop Insurance Scheme aims to mitigate the hardship of the insured farmers against the likelihood of financial loss on account of anticipated crop loss on account of anticipated crop loss resulting from incidence of adverse conditions of weather parameters like rainfall, temperature, frost, humidity etc. This scheme provides insurance coverage and financial support to the farmers in the event of failure of crops due to adverse weather incidence and subsequent crop loss. The scheme covers major food crops such as cereals, millets & pulses, oilseeds and commercial/ horticultural crops. Crops are selected and notified by State Governments. This scheme is available to all kinds of farmers, big or small; landholders, sharecroppers or tenant farmers. Further, the role of PRIs (Panchayati Raj Institutions) is encouraged in implementation of this scheme. The scheme operates on the concept of Area Approach i.e., for the purposes of compensation, a ‘Reference Unit Area (RUA)’ is defined by state government as a homogeneous unit of Insurance. The “Area Approach” is as opposed to “Individual Approach”, where claim assessment is made for every individual insured farmer who has suffered a loss. Such RUA can be a Village Panchayat/ Revenue Circle/ Mandal/ Hobli/ Block/ Tehsil, etc. This RUA shall be notified before the commencement of the season by the State Government and all the insured cultivators of a particular insured crop in that Area will be deemed to be on par in the assessment of claims. The Premium is decided by the insurance companies on RUA level and there is a cap on maximum premium as with MNAIS. The farmers are eligible for premium subsidy and difference between actuarial rates and premium actually paid by farmers are borne by the Government (both Centre and State concerned on 50:50 basis).

Unified Package Insurance Scheme (UPIS)

The Unified Package Insurance Scheme (UPIS) aims at providing financial protection to citizens associated in agriculture sector, thereby ensuring food security, crop diversification and enhancing growth and competitiveness of agriculture sector besides protecting farmers from financial risks. The UPIS will be implemented in 45 selected districts on Pilot basis from Kharif 2016 (July to October, 2016) season. The cover will be for one full year except for crop insurance (which will be bi-annual, separately for Kharif and Rabi seasons) renewable from year to year. The crop insurance will be as per either PMFBY (Pradhan Mantri Fasal Bima Yojana) or WBCIS (Weather Based Crop insurance Scheme). The loanee farmers will be covered through Banks/Financial Institutions whereas non loanee farmer shall be covered through banks and/or insurance intermediaries. This policy provides yield based crop insurance to the farmer based on his ownership rights of land and sown crop. It covers both the personal assets of the farmer like building (fire & allied perils),etc the other assets which help him earn his livelihood such as pumps, tractors, etc owned by farmer. The Sum insured has been capped at Rs.50,000 for building, Rs.20,000 for contents, Rs.25,000 for pump sets, etc. The scheme also provides life insurance protection to the farmer and his/her family members as per the Pradhan Mantri Jeevan Jyoti Bima Yojna and personal accident insurance as per Pradhan Mantri Suraksha Bima Yojana and accidental insurance protection of farmer’s school/college going children.

Livestock Insurance Scheme

The Livestock Insurance Scheme is a centrally sponsored scheme, which was implemented on a pilot basis from 2005 to 2008 in 100 selected districts. The scheme is now being implemented on a regular basis from 2008-09 in 100 newly selected districts of the country. Under the scheme, the crossbred and high yielding cattle and buffaloes are being insured at maximum of their current market price. The premium of the insurance is subsidized to the tune of 50%. The entire cost of the subsidy is being borne by the Central Government. The benefit of subsidy is being provided to a maximum of 2 animals per beneficiary for a policy of maximum of three years. The scheme is being implemented in all states except Goa through the State Livestock Development Boards of respective states. The nodal implementing agency is Department of Animal Husbandry, Dairying & Fisheries under the Ministry of Agriculture.

A few of the previously scrapped agricultural schemes:

Comprehensive Crop Insurance Scheme(CCIS) 

The Comprehensive Insurance Scheme (CIS) was launched in 1985 and covered 15 states and 2 union territories. Participation in the scheme was voluntary. Around 5 million farmers and between 8-9 million hectares were annually covered by this scheme. If the actual yield in any area covered by the scheme fell short of the guaranteed yield, the farmers were entitled to an indemnity on compensation to the extent of the shortfall in yield. The General Insurance Corporation of India administered the scheme on behalf of the Ministry of Agriculture, Government of India. The scheme was scrapped in 1997.

Experimental Crop Insurance

An experimental crop insurance scheme was introduced in 1997-98, covering non-loanee small and marginal farmers growing specified crops in selected districts. The premium was subsidized. The premium collected was about ₹3 crore and the claims amounted to Rs. ₹40 crore. The Government discontinued the scheme during 1997-98 itself.

Farm Income Insurance Scheme

The Central Government formulated the Farm Income Insurance Scheme (FIIS) during 2003-04. The two critical components of a farmer’s income were yield and price. FIIS targeted these two components through a single insurance policy so that the insured farmer could get a guaranteed income. The scheme provided income protection to the farmers by insuring production and market risks. The insured farmers were ensured minimum guaranteed income (that is, average yield multiplied by the minimum support price). If the actual income was less than the guaranteed income, the insured would be compensated to the extent of the shortfall by the Agriculture Insurance Company of India. Initially, the scheme would cover only wheat and rice and would be compulsory for farmers availing crop loans. NAIS (see below) would be withdrawn for the crops covered under FIIS, but would continue to be applicable for other crops. The FIIS was withdrawn in 2004. The recent attempt by the Gujarat government to reintroduce the Farm Income Insurance Scheme (FIIS) can reform agricultural insurance and prevent farm-level distress.

National Agriculture Insurance Scheme (NAIS) 

The Government of India experimented with a comprehensive crop insurance scheme which failed. The Government then introduced in 1999-2000, a new scheme titled “National Agricultural Insurance Scheme” (NAIS) or “Rashtriya Krishi Bima Yojana” (RKBY). NAIS envisaged coverage of all food crops (cereals and pulses), oilseeds, horticultural and commercial crops. It covered all farmers, both loanees and non-loanees, under the scheme. The premium rates varied from 1.5 percent to 3.5 percent of sum assured for food crops. In the case of horticultural and commercial crops, actuarial rates were charged. Small and marginal farmers were entitled to a subsidy of 50% of the premium charged- the subsidy was shared equally between the Government of India and the States. The subsidy was to be phased out over a period of 5 years. The scheme was overtaken by Pradhan Mantri Fasal Bima Yojana in Feb, 2016. Agriculture insurance corporation of India was implementing the scheme.

NAIS operated on the basis of:

  • Area approach – defined areas for each notified crop for widespread calamities.
  • On individual basis – for localized calamities such as hailstorms, landslides, cyclones and floods.

Rashtriya Fasal Beema Karyakram (RFBY)

Agricultural Insurance in India was till recently covered by National Crop Insurance Programme (NCIP) also known as Rashtriya Fasal Beema Yojana. It was launched by the government in 2013 by merging three schemes viz. Modified National Agricultural insurance Scheme (MNAIS), Weather Based Crop insurance Scheme (WBCIS) and Coconut Palm Insurance Scheme (CPIS).  Objectives were to provides financial support to farmers for losses in their crop yield, to help in maintaining flow of agricultural credit, to encourage farmers to adopt progressive farming practices and higher technology in agriculture and thereby, to help in maintaining production, employment & economic growth. Modified National Agricultural insurance Scheme (MNAIS) provided insurance coverage and financial support to the farmers in the event of failure of crops and subsequent low crop yield. Note that NAIS and MNAIS have been discontinued from Kharif 2016, but the ongoing Weather Based Crop Insurance Scheme (WBCIS) and Coconut Palm Insurance Scheme would continue to operate while premium to be paid under WBCIS has been brought on a par with PMFBY.

Foreign Direct Investment (FDI) Policy in Insurance Sector

For many years, the foreign participation in an Indian insurance company was restricted to 26.0% of its equity / ordinary share capital  with the balance being funded by Indian promoter entities. The limit to this foreign investment included both direct and indirect investment and had been a cause of significant lobbying by foreign insurance companies for a change in regulations to increase the FDI limit to 49% of equity issued. The Union Budget for fiscal 2005 had recommended that the ceiling on foreign holdings be increased to 49.0%. The Indian government had supported an increase in the FDI limit, which required a change in the Insurance Act. But with the passage of Insurance Laws (Amendment) Bill, 2015, the Government in March 2015, finally allowed up to 49.0% FDI in the insurance sector so to bring in more foreign investment. In 2016, IRDAI’s chairman TS Vijayan pegged the total foreign investment in the insurance sector at Rs 15,000 crore in FY 2015-16 due to this increase in FDI limit. However, up till early 2016, only up to 26 % FDI was permitted through the automatic approval route. For FDI up to 49%, the approval of the Foreign Investment Promotion Board was required. However, these norms have been now further relaxed. The foreign investment proposals up to 49 per cent of the total paid up equity of the Indian insurance company shall be allowed on the automatic route subject to verification by the IRDAI.

Initial Public Offer (IPO) rules for Indian Life Insurance Companies

A key piece of legislation impacting on the Life Insurance industries capital raising abilities is the lock-in period of 10 years for investment to be limited to promoter group equity investments. Under the Insurance Guidelines, Indian Life Insurance companies can opt for a public issue of equity through an Initial Public Offer (IPO) after 10 years of operations. In October 2010, the securities market regulator, Securities and Exchange Board of India (SEBI), issued disclosure norms for Indian Life Insurance Companies seeking to make an initial public offer for sale of equity shares to the public.

Recent Government Initiatives

  • Foreign investment will be allowed through automatic route for up to 49 per cent subject to the guidelines on Indian management and control, to be verified by the regulators.
  • Service tax on single premium annuity policies has been reduced from 3.5 per cent to 1.4 per cent of the premium paid in certain cases.
  • Government insurance companies can be listed on the exchanges.
  • Service tax on service of life insurance business provided by way of annuity under the National Pension System regulated by Pension Fund Regulatory and Development Authority (PFRDA) being exempted, with effect from April 01, 2016.
  • The Insurance Regulatory and Development Authority (IRDA) of India has formed two committees to explore and suggest ways to promote e-commerce in the sector in order to increase insurance penetration and bring financial inclusion.
  • IRDA has formulated a draft regulation, IRDAI (Obligations of Insures to Rural and Social Sectors) Regulations, 2015, in pursuance of the amendments brought about under section 32 B of the Insurance Laws (Amendment) Act, 2015. These regulations impose obligations on insurers towards providing insurance cover to the rural and economically weaker sections of the population.
  • The Government of India has launched two insurance schemes as announced in Union Budget 2015-16. The first is Pradhan Mantri Suraksha Bima Yojana (PMSBY), which is a Personal Accident Insurance Scheme. The second is Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), which is the government’s Life Insurance Scheme. Both the schemes offer basic insurance at minimal rates and can be easily availed of through various government agencies and private sector outlets.
  • Government of India has launched an insurance pool to the tune of Rs 1,500 crore (US$ 220.08 million) which is mandatory under the Civil Liability for Nuclear Damage Act (CLND) in a bid to offset financial burden of foreign nuclear suppliers.
  • Foreign Investment Promotion Board (FIPB) has cleared 15 Foreign Direct Investment (FDI) proposals including large investments in the insurance sector by Nippon Life Insurance, AIA International, Sun Life and Aviva Life leading to a cumulative investment of Rs 7,262 crore (US$ 1.09 billion).
  • The Insurance Regulatory and Development Authority of India (IRDAI) has given initial approval to open branches in India to Switzerland-based Swiss Re, French-based Scor SE , and two Germany-based reinsurers namely, Hannover Re and Munich Re.

That’s all folks!

One thought on “Insurance Sector in India”

  1. Pingback: Non Banking Financial Institutions – Part 3 | IASBakra

Leave a comment