Policy Update
Mannat Abbot
Background
Insurance plays an important role in protecting individuals and businesses from unexpected financial losses. It provides financial support during difficult situations and helps reduce the burden caused by unforeseen events. By spreading risks across a larger group, insurance not only protects people and businesses but also contributes to the stability of the economy.
The scale of the sector has also increased significantly. In FY 2024-25 alone, insurers issued 41.84 crore policies, collected ₹11.93 lakh crore in premiums and settled claims worth ₹8.36 lakh crore. Assets under management stood at ₹74.44 lakh crore as of March 2025 (IBEF, 2025).
The sector has also undergone major policy reforms over the years. Private insurers were allowed to enter the market in 2000, with the Foreign Direct Investment limit initially set at 26%. This was later increased to 49% in 2014, 74% in 2021 and finally 100% under the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025 (Press Information Bureau, 2025; PRS Legislative Research, 2025).
Key Reforms
Foreign Direct Investment (FDI) refers to investment made by companies or individuals from one country in businesses located in another. In the insurance sector, this allows foreign insurers to invest in or own Indian insurance companies.According to PRS Legislative Research (2025), one of the biggest reforms introduced under the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025 is the increase in the FDI limit from 74 per cent to 100 per cent. The higher limit is available to companies that invest the entire premium within India
However, attracting investment alone is not enough. For these investments to create meaningful change, they need to be backed by a regulatory framework that can keep pace with the changing needs of the insurance sector. This is why the Act also focuses on strengthening the role of the Insurance Regulatory and Development Authority of India (IRDAI). The Act gives IRDAI greater flexibility to frame and update regulations in key areas such as actuarial functions, finance and investments, registration, capital structure, transfer of shares and amalgamations.
It also gives the regulator more powers to take decisions as the sector evolves. For instance, IRDAI can now approve schemes of arrangement between an insurer and a company that is not engaged in the insurance business. If an Administrator is appointed, it also has the power to supersede the insurer’s Board of Directors. Another important change is that IRDAI can now frame regulations relating to the remuneration, commission and rewards payable to insurance agents and intermediaries, including how these payments are made and disclosed.
Overall, these changes give the regulator greater autonomy and make the regulatory framework more flexible and responsive to the needs of the industry. Even then, regulatory reforms alone cannot transform the sector. They need to go hand in hand with operational reforms that simplify the way insurers function and make it easier for them to do business
Similarly, attracting higher investment is only useful if insurers are able to work in a simple, efficient and transparent regulatory environment. This is why the Act also introduces several operational reforms to make the sector function more smoothly. Earlier, insurance companies had to take approval from IRDAI if the value of shares being transferred exceeded 1 per cent of the insurer’s paid-up share capital.
The Act has now increased this limit to 5 per cent, reducing the need for approvals in smaller share transfers. The Act has also expanded the scope of insurance intermediaries. Earlier, it included brokers, insurance consultants and third-party administrators. It now also includes managing general agents and insurance repositories. Another important change is the removal of the minimum paid-up capital requirement of ₹100 crore for insurance co-operative societies engaged in life, general and health insurance businesses.
The Act has also changed the way the Insurance Act applies to certain entities. Earlier, its provisions did not apply to Special Economic Zones (SEZs). The amendment now extends this to International Financial Services Centres (IFSCs) set up within SEZs, along with insurance intermediaries operating in SEZs and IFSCs.
Separately, these changes may seem small, but together they make the regulatory framework simpler and more flexible. They also support the broader objective of creating a more competitive and investment-friendly insurance sector
However, liberalisation is beneficial for policyholders only if they are well-informed about insurance. Otherwise, expanding the insurance sector and fulfilling the mission of providing insurance to everyone by 2047 will be difficult. The bill provides for the introduction of a Policyholders’ Education and Protection Fund to be administered by IRDAI. The main aim of this fund is to protect the interests of the policyholders and to educate them. It will be funded by:
(i) donations or grants from the central government, state governments, IRDAI, companies, or any other institutions
(ii) amounts received as penalties by the IRDAI
(iii) any other amounts specified by regulations
Although liberalisation is the foundation of the Act, its success relies on a wider set of institutional and regulatory reforms aimed at fostering a more competitive, efficient, and transparent insurance sector.
Performance
Insurance is a capital-intensive business, which makes it necessary for companies to maintain adequate capital reserves to cover future claims. Along with this, they need additional capital reserves for expansion, investing in new technology, and meeting regulatory and solvency requirements. Increased foreign investment across the industry could enable insurers to scale operations, improve risk management systems, and enhance customer experience. With higher foreign investment, Indian insurers can adopt new technologies faster and expand their business. With additional investment and global expertise, the industry could expand significantly over the next decade. However, while additional capital can strengthen the supply side of the insurance sector, it does not automatically guarantee wider insurance coverage (ResearchFDI, 2025; PwC India, 2025).
Despite the expected increase in investment, India’s insurance gap is not driven by supply-side constraints alone. Affordability remains one of the biggest problems that is hindering the insurance sector from expanding. Around 90 per cent of people in lower-income groups don’t have access to private insurance across one of the fastest-developing markets due to lack of affordability.
It has also been observed that lack of awareness and financial literacy in non-metropolitan cities and among low-income groups, business owners and unorganised sector employees continues to restrict the uptake of insurance. Trust is another major problem; even today, many people view insurance as a product rather than a financial safeguard that they prefer to seek. So, although FDI is a major step towards strengthening the insurance sector, achieving the goal of wider insurance coverage will require efforts towards improving affordability, awareness and consumer trust (National Insurance Academy, 2025; Indian Institute of Management Kozhikode, 2025).
Impact
Economic Impact
More capital allows insurers to expand their operations, invest in digital platforms, develop new insurance products and improve their claim settlement systems. Foreign insurers can also bring advanced technologies and global expertise, helping Indian insurers improve the way they work. This can make the sector more efficient, strengthen regulatory compliance and provide better services to customers (ResearchFDI, 2025; PwC India, 2025).
Consumer impact
As more insurers enter the market, competition is likely to increase. This can encourage companies to improve their customer service and introduce more innovative insurance products. It will also give customers a wider range of policies to choose from, making it easier for them to find insurance plans that suit their needs (The Indian Express, 2025).
Social Impact
Allowing full foreign ownership can help insurers expand their reach into underserved regions, particularly rural areas where insurance coverage is still limited. As more companies enter the market and existing insurers expand their operations, the sector is also likely to create more employment opportunities across different areas of financial services. Foreign insurers can help in skills development in specialised fields such as underwriting, actuarial science and sales. Given that India’s insurance market is already one of the fastest-growing in the world, additional investment and expertise could accelerate its growth over the next decade (PwC India, 2025).
However, these benefits can be fully realised only if they are accompanied by greater awareness and improved affordability, bringing India closer to its vision of Insurance for All by 2047.
Emerging Issues
While the Act has the potential to strengthen India’s insurance sector, a few challenges remain. One of the biggest issues is the impact on domestic insurers.
Pressure on domestic insurers: Large foreign insurance companies have greater financial resources, advanced technology and wider product offerings, which could make it difficult for smaller Indian insurers to compete (PwC India, 2025).
Need for stronger regulatory oversight: As more foreign companies enter the market, the role of IRDAI becomes even more important. The regulator will have to make sure that companies maintain adequate capital, protect the interests of policyholders and follow fair market practices. Increased competition should also not lead to very high pricing or excessive risk-taking, as this could affect the long-term stability of the sector (PRS Legislative Research, 2025).
Low insurance awareness and product complexity: Most insurance in India is sold through agents, and it is usually seen as something being sold to customers rather than something the customers want to buy. Many customers are not aware of the full benefits, exclusions or limitations of their policies, which can often lead to disappointment and misunderstanding further down the line. Policy documents are long and full of legalese, so they are hard for a normal person to understand. And if more people are to buy insurance, products will also need to be simpler and easier to understand (Zopper, 2025).
Delays in claim settlement: Claim settlement is an area that needs some work. This can be a frustratingly long process with lengthy procedures, delays and complex paperwork, especially at a time when policyholders need financial support the most. The claims process should be simple, transparent and customer-friendly and not add another layer of stress. As we see today, affordability and lack of awareness are big issues for the public, especially in non-metropolitan cities for lower-income groups (Zopper, 2025; National Insurance Academy, 2025).
Way Forward
As customer expectations continue to change, insurers will need to keep improving their products while supporting IRDAI’s vision of “Insurance for All” by 2047. To do this, they need to focus on the key challenges facing the sector: awareness, affordability, accessibility and trust. At the same time, using technology while keeping customers at the centre of their approach can help them meet changing needs and stay competitive (Indian Institute of Management Kozhikode, 2025).
Simplify insurance products
Insurers should focus on keeping insurance products simple and making sure customers clearly understand what they are buying. A strong fraud management system and a smooth claim settlement process can also help build trust. Developing flexible and customer-centric insurance products that meet different customer needs can further improve the insurance experience (Universal Sompo General Insurance, 2025).
Improve affordability
“Insurance for All” should mean that every individual has access to affordable insurance, irrespective of their income, location or social status. However, affordability continues to be one of the biggest challenges in expanding insurance coverage. Introducing low-cost Basic Insurance Products (BIPs), especially for informal workers through daily or weekly micro-payments, can help make insurance more accessible (Indian Institute of Management Kozhikode, 2025).
Expand accessibility
Expanding distribution through initiatives such as Bima Vistaar, Bima Sugam and Bima Vahak, along with Common Service Centres, post offices, self-help groups, retail outlets and digital marketplaces, can improve insurance access, especially in underserved regions.
Leverage technology and innovation
If these reforms are implemented effectively, along with greater use of technology and stronger consumer trust, the insurance sector can become an important pillar of India’s financial security in the years ahead.
References
PRS Legislative Research. (2025). The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Bill, 2025. https://prsindia.org/billtrack/the-sabka-bima-sabki-raksha-amendment-of-insurance-laws-bill-2025
Press Information Bureau. (2025). Cabinet approves the Insurance Laws (Amendment) Bill, 2025. Government of India. https://www.pib.gov.in/indexd.aspx?reg=48&lang=2
PwC India. (n.d.). India’s insurance vision: Challenges and the way forward. https://www.pwc.in/assets/pdfs/industries/financial-services/insurance/indias-insurance-vision-challenges-and-the-way-forward.pdf
National Insurance Academy. (n.d.). Enhancing insurance inclusivity and bridging the protection gap. https://indianexpress.com/article/explained/explained-economics/irdai-insurance-reforms-explained-10810249/
Indian Institute of Management Kozhikode. (n.d.). Insurance for all by 2047. https://iimk.ac.in/announcements/insurance-for-all-by-2047
K.K. Wagh Arts, Commerce, Science and Computer Science College. (n.d.). Policy reforms in the life insurance sector. https://asck.kkwagh.edu.in/uploads/research_depts/29.pdf
Conference World. (n.d.). Policy reforms in the life insurance sector and economic development. https://data.conferenceworld.in/OUCIPSS19May18/14.pdf
ResearchFDI. (n.d.). Benefits of foreign direct investment (FDI). https://researchfdi.com/benefits-fdi-foreign-direct-investment/
Universal Sompo General Insurance. (n.d.). 100% FDI in insurance. https://www.universalsompo.com/blogs/general-insurance/100-fdi-in-insurance/Zopper. (n.d.). Top challenges of the insurance industry in India.
Canara HSBC Life Insurance. (n.d.). Importance of insurance. https://www.zopper.com/blog/top-5-challenges-of-the-insurance-industry-in-india
PNB MetLife. (n.d.). Importance of insurance and how it protects your finances. https://www.pnbmetlife.com/articles/life-insurance/importance-of-insurance-and-how-it-protects-your-finances.html
India Brand Equity Foundation. (n.d.). Insurance sector in India. https://www.ibef.org/industry/insurance-sector-india
About the Contributor
Mannat Abbot is pursuing a B.A. (Hons.) in Economics at the College of Vocational Studies, University of Delhi and serves as a Research & Editorial Intern at IMPRI. She is passionate about public policy research, economics and data-driven analysis, with interests in macroeconomics, economic policy, and evidence-based policymaking.
Acknowledgements
The author sincerely acknowledges the guidance and constructive feedback provided by Ameya Satam and Anushree Khare throughout the preparation of this article. Their valuable suggestions and thoughtful observations helped strengthen the analysis, improve the organisation of ideas, and enhance the overall quality of the manuscript. The author also extends gratitude to everyone whose support and encouragement contributed to the successful completion of this work.
Disclaimer
Any remaining errors, omissions, or interpretations are solely the responsibility of the author and do not necessarily reflect the views of the reviewers or IMPRI.
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