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Basic Principles of…

Language : Hindi |

Insurance is a financial product for protecting a dependent (family or an individual) or a business from a future financial loss. The guarantee letter which assures making loss good is known as the Insurance Policy. Going for an insurance policy is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.

A business entity that provides such assurance against future loss (known as insurance) is called the insurer, insurance company, insurance carrier or simply an underwriter. A person or business that buys insurance is known as an insured or as a 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 convertible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship. For example, when an insured person expires, the insurer can not return the dead person but tries to make good the financial loss happened owing to the death of the deceased person. The insured sums are paid to a designated person known as the nominee.

As mentioned earlier, the insured person or business receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium. If the insured person experiences a loss which is potentially covered under the insurance policy, the insured person submits a claim to the insurer for processing by a claims adjuster

Reinsurance: The insurer may hedge its own risk by taking out reinsurance, whereby another insurance company agrees to carry some of the risks, especially if the primary insurer deems the risk too large for it to carry. This can be compared to the consortium of lenders or multiple banking arrangement in case of bank lending to large borrowers.

In India, the insurance industry (or insurance sector) falls under Banking, Financial Services and Insurance sector which is popularly known as BFSI. Insurance sector is also classified under two broad sectors: 1) Life and 2) Non-Life (or General Insurance). Health Insurance falls under General Insurance. The regulatory authority for the insurance sector is known as Insurance Regulatory and Development Authority of India (IRDAI) which is sometimes referred as simply IRDA. Its headquarter is in Hyderabad.

The insurance industry of India has 57 insurance companies -24 are in the life insurance business, while 33 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company and is at pole position. There are six public sector insurers in the non-life insurance segment. In addition to these, there is a sole national re-insurer, namely General Insurance Corporation of India (GIC Re). Other stakeholders in the Indian Insurance market include agents (individual and corporate), brokers, surveyors and third-party administrators servicing health insurance claims.

Market Size

In India, the overall market size of the insurance sector is expected to US$ 280 billion in 2020.

Government's policy of insuring the uninsured has gradually pushed insurance penetration in the country and proliferation of insurance schemes.

Gross premium collected by life insurance companies in India collectively, increased from Rs. 2.56 trillion (US$ 39.7 billion) in FY12 to Rs. 7.31 trillion (US$ 94.7 billion) in FY20. During FY12-FY20, premium from new business of life insurance companies in India increased at a CAGR of 15% to reach Rs. 2.13 trillion (US$ 37 billion) in FY20.

Overall insurance penetration (premiums as% of GDP) in India reached 3.71% in FY19 from 2.71% in FY02.

Life insurers reported 14% YoY growth in individual annualised premium equivalent (APE) in October 2020, compared with 4% YoY in September 2020.

The market share of private sector companies in the non-life insurance market rose from 15% in FY04 to 56% in FY21 (till April 2020). In life insurance segment, private players had a market share of 31.3% in new business in FY20.

Investments and Recent Developments

The following are some of the major investments and developments in the Indian insurance sector.

  • In November 2020, the Competition Commission of India (CCI) approved the acquisition of General Insurance Business of Bharti AXA General Insurance Company Limited (Bharti AXA) by ICICI Lombard General Insurance Company Limited (ICICI Lombard).
  • In November 2020, Airtel Payments Bank tied up with Bharti AXA General Insurance to offer comprehensive car insurance to customers.
  • In October 2020, PhonePe launched cashless repair services, which will be available through a countrywide network of third-party garages associated with Bajaj Allianz General Insurance.
  • Enrolments under the Pradhan Mantri Suraksha Bima Yojana (PMSBY) reached 154.7 million till December 2019 since its launch.
  • Over 53.8 million famers were benefitted by the Pradhan Mantri Fasal Bima Yojana (PMFBY) in FY20.
  • In April 2020, Axis Bank acquired an additional 29% stake in Max Life Insurance.
  • In November 2019, Airtel partnered with Bharti AXA Life to launch prepaid bundle with insurance cover.
  • In September 2019, Competition Commission of India (CCI) approved acquisition of shares in SBI General Insurance by Napean Opportunities LLP and Honey Wheat.

Government Initiatives

The Government of India has taken number of initiatives to boost the insurance industry. Some of them are as follows:

  • As per Union Budget 2019-20, 100% foreign direct investment (FDI) was permitted for insurance intermediaries.
  • In September 2018, National Health Protection Scheme was launched under Ayushman Bharat to provide coverage of up to Rs. 500,000 (US$ 7,723) to more than 100 million vulnerable families. The scheme is expected to increase penetration of health insurance in India from 34% to 50%.
  • The Insurance Regulatory and Development Authority of India (IRDAI) plans to issue redesigned initial public offering (IPO) guidelines for insurance companies in India, which are to looking to divest equity through the IPO route.
  • IRDAI has allowed insurers to invest up to 10% in additional tier 1 (AT1) bonds that are issued by banks to augment their tier 1 capital, in order to expand the pool of eligible investors for the banks.
  • In October 2020, the Andhra Pradesh rolled out free of cost crop insurance scheme for the state farmers.

Road Ahead

The future looks promising for the life insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers.

The overall insurance industry is expected to reach US$ 280 billion by the end of 2020. Life insurance industry in the country is expected to increase by 14-15% annually for the next three to five years.

The scope of IoT in Indian insurance market continues to go beyond telematics and customer risk assessment. Currently, there are 110+ InsurTech (on the lines of FinTech such as policybazaar.com) start-ups operating in India. Demographic factors such as growing middle class, young insurable population and growing awareness of the need for protection and retirement planning will support the growth of Indian life insurance.