Finance ministry mulls changes in insurance laws; considers easing entry level capital requirement

The finance ministry is contemplating changes in insurance laws, including reduction in minimum capital requirement, with a view to increasing the insurance penetration in the country.

Insurance penetration in India increased from 3.76 per cent in 2019-20 to 4.20 per cent in 2020-21, registering a growth of 11.70 per cent. Insurance penetration measured as the percentage of insurance premium to GDP witnessed handsome growth during the year, mainly due to the outbreak of COVID-19.

The ministry is doing a comprehensive review of the Insurance Act, 1938 and also looking at making relevant changes to help push growth of the sector, sources said, adding the process is at a preliminary stage. One of the provisions being considered is lowering the minimum capital requirement of Rs 100 crore for setting up an insurance business, the sources said.

Easing capital requirement would allow entry of differentiated insurance companies like in the banking sector, which has categories like universal bank, small finance bank and payments bank. With the ease of entry capital norms, sources said, there could be entry of companies focussed on micro insurance, agriculture insurance or insurance firms with regional approach.

So for them, the solvency margin requirement would also be different but without compromising on policyholders' interest, the sources said. Entry of more players would not only push penetration but result in greater job creation in the country.

Presently, there are 24 life insurance companies and 31 non-life or general insurance firms, including specialised players like the Agriculture Insurance Company of India Ltd and ECGC Limited. Last year, the government brought an amendment in the Insurance Act to allow increasing foreign holding in insurers from 49 per cent to 74 per cent. Besides, Parliament passed the General Insurance Business (Nationalisation) Amendment Bill, 2021, allowing the central government to pare stake to less than 51 per cent of the equity capital in a specified insurer, paving the way for privatisation.

In 2015, the Insurance Act was amended for raising the foreign investment cap from 26 per cent to 49 per cent. All these amendments since privatisation of the insurance sector have led to exponential growth. According to a study, India is likely to become the sixth-largest insurance market in the world in the next 10 years, supported by regulatory push and rapid economic expansion.

Total insurance premiums in India will grow by an average 14 per cent per annum in nominal local currency terms over the next decade, making India the sixth largest in terms of total premium volume by 2032 from 10th largest in 2021. Both life and non-life insurers collected a premium of Rs 8.2 lakh crore during 2020-21.