Composite License For Insurance Sector Explained

Have you ever noticed that you cannot purchase health or four-wheeler insurance from a life insurance company and vice versa? This is because current regulations prohibit insurance companies from offering or selling general and life insurance policies to customers through a single entity. Instead, they must have separate entities managing both insurance verticals and independent risk management and IT systems in place.

For instance, ICICI Lombard handles the general insurance segment, and ICICI Prudential Life Insurance handles the life insurance segment.

However, if the government and insurance regulators have their way, a person can purchase all his insurance needs from a single company. And the government plans to do it by issuing a composite license to insurance companies, allowing them to sell both segments of insurance policies.

What is a Composite License for Insurance Sector?

To increase insurance penetration in India and simplify the insurance buying and selling processes, the government intends to amend the Insurance Act of 1938 to eliminate separate licenses for different classes of insurance. Instead, the proposed amendments request companies to issue life and non-life insurance policies, termed a composite license.

However, before making such amendments, the government has put out draft amendments for feedback from stakeholders and is open till December 15th.

In India, the concept of a composite license is not new. For example, LIC was a composite insurer till the early 1970s when its general insurance business unit, Oriental Insurance, was carved out and nationalized as a separate entity.

Why does India have Separate Licenses for Life and General Insurance?

Risk. Yes, you read that right. All insurance segments have different underwriting risks, which mandates the insurance company to have separate minimum capital requirements for each of these insurance segments.

For example, in general, and health insurance, the policyholder’s money is at risk for 12 months. In contrast, the policyholder’s money is at risk for several years to decades in life insurance. As a result, India has separate licenses for life and general insurance to eliminate the risk of insurance companies diverting policyholder funds from one insurance segment to another. In addition, current rules and regulations establish distinct minimum capital requirements for all classes and subclasses of insurance. For example, under existing rules, a paid-up capital of ₹100 crores is required to set up life, general, and health insurance, while ₹200 crores are necessary for the reinsurance business.

What changes will the Composite License bring to the Insurance Sector?

According to the draft of the proposed amendments, the Indian regulator plans to do away with legally mandated minimum capital requirements where the insurer intends to carry on businesses with more than one segment in insurance. Instead, the minimum capital requirements will be based on the solvency margin of the business in all the insurance segments.

The details of the amendments will be worked out after the feedback from stakeholders to the government. Still, per initial discussions, insurers must maintain a separate account for all receipts and payments for each insurance segment and sub-class.

How will a Composite License benefit policyholders?

According to the Department of Financial Services, the proposed amendments would improve policyholders’ financial security, promote their interests, and increase returns.

The composite license for insurance sector would allow companies to develop a new life, non-life, and health insurance products if they meet regulatory requirements. In addition, due to economies of scale, the customer would benefit from lower premium rates and easier access to insurance products.

It will bring more innovation into the market through new products and is expected to improve insurance penetration and awareness.

Key Challenges in Composite License Regime

The key challenge in the composite license for insurance sector is how regulators will enforce the minimum capital requirements when both life and non-life insurance segments can operate under one umbrella.

One of the key concerns is that it will increase regulatory oversight and reporting. As a result, insurance companies will have to invest more in IT and find skilled professionals with expertise in all insurance segments.

Insurance being a critical sector of the economy, composite licenses present a significant challenge to regulators and the government in ensuring the protection of policyholders and the risks that pose in the event of an insurance company’s failure.

Conclusion

Many parts of the world have a composite license regime that benefits policyholders. However, as a price-sensitive country with low insurance awareness and penetration (4.1% in the life insurance segment in FY21 and 0.4% in health insurance in 2019), regulators must ensure that policyholders are better protected and that any failure does not pose a systematic risk.

But, for the insurance sector, the proposed composite license will bring in necessary investments, expanding business lines, and mergers and acquisitions.

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