Govt eyes insurance law revamp: Composite licensing, fair play for PSU insurers

The Insurance (Amendment) Bill, 2024, if passed, will allow state-owned insurers to obtain composite licences to sell both life and non-life products, avoiding amendments to the Life Insurance Corporation Act of 1956 and the General Insurance Business (Nationalisation) Act, 1972.

The public sector life and general insurers are currently governed by separate parliamentary acts.

"This provision, included in the final draft after stakeholder consultations, eliminates the need to amend the LIC Act and GIBNA, paving the way for broader industry expansion and improved accessibility and affordability of insurance for all citizens," the first person mentioned above said, requesting anonymity.

A composite licence will allow a single entity to offer both life and non-life products, unlike now, when these two activities have to be carried by separate corporate entities, the person added. “Composite insurers are also allowed in jurisdictions such as Singapore, Malaysia, and the UK."

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Industry divided

The proposal for composite licences initially divided the industry, with some viewing it as a progressive step. State-run general insurers had opposed it over concerns about market fragmentation and the entry of non-serious or financially weaker players.

However, the revised changes have gained support, incorporating safeguards to address these concerns.

The four PSU general insurers are United India Insurance, National Insurance, Oriental Insurance, and New India Assurance. Among these, only New India Assurance is profitable. The only listed PSU general insurer reported a net profit of ₹1,129 crore in FY24.

The consultative process is complete and the draft bill has been finalised for Cabinet approval. It is likely to be introduced during the Budget session for parliamentary approval and subsequent implementation, said the second person mentioned above.

The finance ministry has finalised the bill after an extensive public and stakeholder consultation process, during which over 1,000 pages of feedback were received.

State governments were also consulted, and some of their suggestions have been incorporated, the second person mentioned above said.

"The process has resulted in a strong, progressive, and forward-looking legislation that requires no further changes and can proceed directly to parliamentary approval by the incoming government after the elections," the person added.

A spokesperson for the ministry of finance and the secretary of the department of financial services didn't respond to emails.

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Raising FDI limit

The insurance sector reforms outlined in the bill include a landmark provision to allow 100% foreign direct investment (FDI), raising the cap from 74%.

This move is expected to attract significant capital inflows, foster growth, enable financially robust foreign insurers to operate independently in India, and strengthen competition and innovation in the industry.

However, this enhanced freedom for foreign players will require amendments to operationalise rules to attract investments.

Current regulations impose restrictions on dividend distribution and require a majority of directors, key management personnel, and at least one among the chairperson, managing director, or chief executive officer to be resident Indian citizens.

These clauses will require revision to align with the proposed reforms and ensure seamless implementation.

“The proposed 100% FDI in insurance will attract foreign investments, foster innovation, and increase market competition, which can drive higher insurance penetration," said Shruti Ladwa, partner and Insurance Leader, EY India.

“Composite licensing will enable insurers to offer comprehensive offerings, facilitate cross-sell opportunities, streamline operations, reduce costs, and improve consumer access and penetration," she added.

While 100% FDI and composite licensing tackle broader challenges, easing capital requirements for niche/single-product insurers can accelerate market entry and scalability, helping insurers reach underserved segments, Ladwa said.

"Targeted capital flexibility for specific product categories can empower insurers to offer tailored solutions to bottom-of-the-pyramid customers. However, it is vital to maintain robust solvency standards through a risk-based capital (RBC) framework to ensure long-term financial stability and sustainable growth," she added.

The amendment bill may introduce key changes, including allowing insurance agents to sell products from multiple companies.

While it is expected to be tabled in the second part of the Budget session, finance minister Nirmala Sitharaman may announce it during her Budget speech.

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Expanding the sector

The bill also eases entry for overseas reinsurers by reducing the net owned funds requirement from ₹5,000 crore to ₹1,000 crore.

Additionally, it empowers the Insurance Regulatory and Development Authority of India to specify lower entry capital, starting from ₹50 crore, for micro and niche insurers targeting underserved segments.

"A more conducive regulatory environment will drive the expansion of the insurance sector and support the goal of 'Insurance for All' by 2047," said Adil Ladha, partner at Saraf and Partners.

He highlighted that the proposed reforms aim to enhance insurance accessibility and affordability, modernise the industry, and foster growth.

To achieve this vision, Ladha emphasised the need for increased financial literacy, simplified regulations, improved claims processes, expanded distribution networks, and broader coverage.

He added that the government's proposed amendments mark a significant step toward realising these objectives and strengthening the foundation for the industry's long-term development.

The capital requirements for insurance and reinsurance remain unchanged at ₹100 crore and ₹200 crore, respectively, but the composite license introduces a higher minimum capital threshold of ₹150 crore.

The bill also introduces the concept of captive insurers, enabling conglomerates to create insurers for their internal business risks. Other changes include a differential solvency margin, alignment of insurance companies with banks on share-transfer approvals, and the removal of commission payment limits.

India’s general insurance market comprises four PSU entities and 23 private players

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