New laws to usher in insurance reforms

In the monsoon session starting 20 July, the Centre is expected to introduce two pieces of legislation—the Insurance Laws (Amendment) Bill, 2023, and the Insurance Bill, 2023, the people said on condition of anonymity. The first legislation would be aimed at reforms to boost insurance penetration, improve efficiency, and enable product innovations. The Insurance Bill, 2023, on the other hand, is being drafted to simplify and update the legal framework governing the sector. It entails the repeal and re-enactment of the Insurance Act, 1938, aiming to simplify pre-constitutional enactments by renumbering and eliminating obsolete British-era provisions.

“The draft of the Insurance Laws (Amendment) Bill, 2023, has already been sent to the Union cabinet for approval before it is introduced in Parliament. The draft Insurance Bill, 2023, is being finalized, and stakeholder consultation is being completed so that this Bill could also be placed in the coming session. If the Bills secure parliamentary approval this year, some of the newer provisions, including changed licensing norms, could be made operational later this year or early FY25,” one of the two people cited earlier said.

While queries sent to the finance ministry’s spokesperson remained unanswered, a government official said the insurance sector reforms were a priority and that progressive legislation would be introduced.

The draft Insurance Laws (Amendment) Bill, 2023, will introduce changes, including easier minimum capitalization requirements for insurers. Currently, the law mandates minimum capital of ₹100 crore for life, general, and health insurance businesses and ₹200 crore for reinsurance businesses.

The proposed amendments will provide flexibility to the Insurance Regulatory and Development Authority of India (Irdai) to set varying minimum capital based on the classes/sub-classes of insurance businesses the insurer engages in. This would enable micro-insurers, which are now deterred by high capitalization needs, to offer affordable insurance cover in rural areas and to low-income people.

The new law may also include a provision for granting composite licences to insurers where a single entity could offer life and non-life products, excluding reinsurance operations. Composite insurers are also allowed in jurisdictions such as Singapore, Malaysia, and the UK.

The draft Bill has also proposed allowing insurers to provide ancillary services related to the insurance business to policyholders. There is also a proposal to permit insurers to distribute other financial products as may be specified by regulations issued by the insurance regulator. It has also introduced the concept of a “captive insurer”, a general insurance company undertaking business exclusively for its holding/ subsidiary/ associate companies. This move will likely allow conglomerates and corporate groups to incorporate an insurer to cover business-related risks within their groups.

The amendments also bring several other changes, including simplified investment conditions, reduced net-owned fund requirement for foreign reinsurers, differential solvency margin, and bringing insurance companies on par with banks regarding share-transfer approval. Furthermore, the Bill proposes to remove limits on commission payments.

The Bill also aims to maintain the independence of general and life insurance councils, with no plans to change their composition by including government representatives. Industry executives emphasized the importance of wider representation in the councils, advocating against any changes that compromise their autonomy, the official said.

The draft Bill incorporates several recommendations made by the insurance regulator and submitted to the government.

Updated: 03 Jul 2023, 11:53 PM IST