Capital, confidence and consumer trust: Insurance law changes a defining moment for the sector

Insurance, by its very nature, is a capital-intensive and long-gestation business. It provides a financial safety net to families and businesses against unforeseen risks and unplanned expenses, while enabling entrepreneurs to take risks and scale up. To deliver this protection and stability, insurers require patient, long-term capital that domestic sources alone cannot always provide at scale.

Since FDI was first permitted in the insurance sector in 2000, the industry has attracted nearly RS 1 lakh crore of foreign capital. This inflow has materially accelerated sectoral development, with the industry expanding nearly 12 times in number of participants and over 25 times in premium size since liberalisation.

For decades, the Indian insurance market has been characterised by its growth potential, buoyed by robust economic expansion, demographic dividends, and rising financial awareness. Yet, despite these favourable fundamentals, insurance penetration — measured as premiums as a percentage of GDP — has remained modest, well below global benchmarks.

Recent data reflects that the increase in the FDI limit could give a boost to  investments and also play an important role in increasing the penetration of insurance, which, according to Swiss Re Institute, stands at 3.8 percent of the GDP as of 2024. The number is much lower than the global average and reflects a huge unserved and underserved population.

Towards 'insurance for all'

The timing of this reform is significant. As India advances towards the vision of Viksit Bharat, the need for a robust insurance sector has never been greater. Despite progress, insurance penetration remains modest, and the country continues to face a protection gap of nearly 90 percent.

Increased capital availability will allow insurers to invest meaningfully in distribution, particularly across tier 2 and 3 cities and rural regions, advancing the vision of "Insurance for All by 2047". Over time, this will also catalyse human capital development, creating specialised jobs and positioning India as a global talent pool for insurance and risk management.

Apart from the capital reforms, the new law will also introduce several measures to improve ease of doing business. The decision to introduce one-time registration for insurance intermediaries will ensure uninterrupted service to customers and at the same time reduce costs for the service provider who will be able to concentrate on investments in talent, technology, and market expansion. Lastly, on the side of the regulator, perpetual licensing will free up regulatory resources for active supervision and policy development.

Insurers will see positive changes in policies such as relaxing net owned fund norms in foreign reinsurance branches thereby attracting more reinsurers to India which will deepen domestic risk retention and reduce foreign exchange outflow. Permitting mergers between insurance and non-insurance companies will simplify corporate structures, improve operational efficiency, and provide clearer exit options for investors, encouraging fresh capital inflows.

Raising the threshold for IRDAI approval on share transfers from 1 percent to 5 percent will reduce procedural friction, allowing both insurers and regulators to focus on strategic oversight rather than routine approvals.

Equally important are the consumer-centric and governance-focused provisions. The introduction of the Policyholders’ Education and Protection Fund under IRDAI would safeguard policyholders’ interests, promote awareness of insurance benefits and rights and educate citizens on grievance redressal mechanisms. Empowering IRDAI to disgorge wrongful gains aligns with global best practices, deterring misconduct and reinforcing ethical standards.

Its alignment with the Digital Personal Data Protection Act, 2023 further strengthens data privacy, accuracy and security, which is critical in a sector built on trust. Standardising the regulation-making process and rationalising penalties will promote transparency, consistency, and fairness, while ensuring that regulation remains proportionate and outcome-focused.

Collectively, these reforms signal a decisive shift towards a more resilient, competitive and consumer-first insurance ecosystem. The opportunity now lies in effective implementation and sustained collaboration among policymakers, regulators and industry participants.

If executed well, this reform will not only deepen insurance penetration but also ensure that financial protection becomes a cornerstone of India’s growth story. At HDFC Life, we see this as an opportunity to innovate responsibly, expand protection to millions more Indians, and partner meaningfully in the nation’s journey toward prosperity.