Contributed by Suhasini Thakur and Arnav Sinha

Introduction

One medical bill and a person is plunged below the poverty line—a statement that may, at first glance, appear extreme but is, as highlighted in the Sixty-Sixth Report of the Committee (‘Sixty-Sixth Report’), a grim reality for many in the country. With insurance penetration in India at merely 4.2% compared to the global average of 7%, and over 75% of this being concentrated in life insurance alone, this grim situation shows no signs of abating. Consequently, the insurance sector, in its entirety, becomes a significant matter of legal and public discourse.

Against this backdrop, with the Insurance Act Amendment Bill in the pipeline, this article seeks to examine how the introduction of composite licences could serve as a potential remedy to the prevailing challenges. The authors, through an analysis of the mechanisms adopted in countries such as Singapore and the Philippines that allow composite licensing, explore the approaches through which such a reform can be effectively integrated into the current Insurance licence regime.

Composite Licensing In Insurance 

In the literal sense, the term composite means something that is made up of different parts, while a licence signifies a permit to undertake a specific activity. Combined, in a legal context, a Composite Licence refers to a single licence or permit that allows the holder to engage in multiple regulated activities under a single unified instrument, as opposed to managing various segments of an industry through separate licences or permits.

In the insurance sector, a composite licence would grant insurers, i.e., entities which provide coverage to third parties against unforeseen losses and liabilities, the ability to operate across multiple or all classes of insurance business. Such a framework can not only simplify the licencing process but also eliminate the need for separate licences for different categories of insurance, thereby increasing operational efficiency. At the same time, it can enable insurers to offer innovative products to consumers, such as single policies that provide life, health, and savings coverage. However, this is prohibited under the current licence framework via Regulation 4 of the Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations, 2000.

Current Licence Framework

In India, the Insurance Act, of 1938 (‘Act’), combined with regulations by the Insurance Regulatory Development Authority of India (‘IRDAI’), forms the foundational legislative framework governing the insurance sector. Under the present arrangement, Regulation 4 permits an insurer to apply for registration in only one specific class of insurance business at a time, namely the life insurance, general insurance, health insurance, or reinsurance.

The Act imposes certain financial requirements under Section 6 which stipulates the following different minimum capital requirements for the various classes of insurance business: (a) a minimum of 100cr. paid-up equity capital for carrying on the life or general insurance business; (b) a minimum of 100cr. paid-up equity capital for carrying on the health insurance business; (c) a minimum of 200cr. paid-up equity capital for carrying on re-insurance business.  These requirements are kept differentiated due to the unique financial and risk considerations associated with each class of insurance.

Moreover, the Act under Section 64VA  mandates insurers and re-insurers to have a minimum solvency margin whereby it maintains the value of its assets over and above their liabilities with no less than 50% of the minimum capital specified under Section 6. Section 64VA further provides that IRDAI can specify a control level of solvency margin and in case it does not achieve that then the correction is required under Section 64VA (4), wherein the insurers shall furnish a financial plan directed to achieve correction of margin within a period not exceeding 6 months.

This compartmentalisation, though ensuring a degree of financial compliance, puts several operational constraints on insurers and reinsurers. Firstly, it requires establishing multiple entities to operate in different classes of insurance, which limits their ability to diversify risk across different classes of insurance. Secondly, the framework increases administrative overheads, regulatory compliance burden, and associated costs, thereby making the insurance expensive for the end customer. Lastly, the already existent structure disallows the smooth interoperability of services that a compositional licence could otherwise afford, such as offering multigroup insurance products under an umbrella of operations.

Conscious of these issues and challenges, the Parliament and Department of Financial Services and the Ministry of Finance have, through the Sixty-Sixth Report, proposed amendments for key provisos of this Act. In this regard, India can draw valuable lessons from Singapore and the Philippines, as both nations have successfully implemented composite licensing in markets with regulatory structures comparable to India. Furthermore, while other countries also permit composite licenses, these two provide particularly relevant models due to their similar approach to balancing financial stability with market expansion.

Lessons From Singapore And The Philippines

The insurance market of Singapore is booming and is expected to grow tremendously in the coming years. One of the reasons for better insurance penetration in Singapore is that its Insurance Act 1966 (‘Insurance Act’) allows composite licensing. Section 4 of the Insurance Act states that insurers licenced for carrying out life insurance business may also offer general short-term accident and health policies without a separate general insurance business licence, thus enabling composite licensing. It further states that insurers licenced for both life and general business can classify such policies under either category.

To acquire a Composite Licence, the procedure prescribed under Section 11 of the Insurance Act must be followed. This includes submitting an application and obtaining the requisite approval from the  Monetary Authority of Singapore (‘MAS’). MAS through Notice 133 – “Valuation and Capital Framework for Insurers” prescribes the procedure and manner of valuation of assets and liabilities of all licenced insurers.

Another country that, in a similar fashion to Singapore, allows Composite Licences is Philippines. The Insurance Commission, under the powers enshrined by Insurance Code of the Philippines (‘Code’), regulates the insurance sector. Section 193 of the Code states that insurance companies can engage in both life and non-life insurance simultaneously, provided it is explicitly authorised by the Commissioner. It is, however, important to note that Composite Licences have been successful in these countries due to enhanced compliance requirements.

Capital Requirements: 

In Singapore, Regulation 3 of the Insurance (Valuation and Capital) Regulations 2004 (‘IVCR’) lays down the minimum requirement of paid-up ordinary share capital of S$10 million to get a composite licence while only S$5 million is needed for individual licences. In the Philippines, the Insurance Commission’s Department Order No. 15-2012, dated June 1, 2012 outlines the minimum paid-up capital requirements for a new composite insurance company as a PUC of 2 billion Pesos whereas only 1 billion Pesos is needed for individual licences. Both the countries have the same ratio of capital needed for individual to composite licences which is 1:2. This ensures that composite insurers have a better solvency margin and are more financially stable, thus protecting the interests of the consumers. India should also adopt a similar ratio which ensures better financial stability and a greater solvency margin for the composite licence holders.

Utilization of Capital:

Another important factor that requires due consideration is how the capital is to be allocated and utilised. Both Singapore and the Philippines have different approaches to this allocation. Issuance Circular No. 2018-45 of the Philippines provides that this amount has to be divided into 1 billion pesos for both life units and non-life units. On the other hand, Singapore merely mandates a separate insurance fund for each class of business carried on by the insurer and has no mention of a fixed allocation.

While a flexible approach like Singapore’s is well-suited for an evolving market. India’s vast population and growing insurance sector may, in the long run, benefit from the risk mitigation advantages of fixed allocation. Thus, India can initially consider adopting an approach similar to Singapore, which requires separate insurance funds without fixed capital allocation. It allows insurers to dynamically allocate resources based on market demand, ensuring optimal utilisation. Subsequently, as insurance penetration grows and demand becomes more balanced, a bifurcation in paid-up capital requirements, similar to the Philippines, could be introduced.

Compliance:

In Singapore, Regulation 4 of the IVCR mandates insurers to ensure fund solvency, promptly report breaches, submit recovery plans, undergo audits, seek MAS approval for capital actions, and maintain contingency reserves. This helps composite insurers in Singapore maintain financial soundness without risking the interests of policyholders. In Philippines the Code also empowers the Commissioner to adopt risk-based capital approaches to ensure solvency, especially critical for composite insurers managing diverse portfolios. While India enforces similar compliance for individual licences, its insurance market is still developing, with lower penetration and a higher protection gap compared to mature economies. This makes heightened regulatory oversight crucial for composite licences to prevent systemic vulnerabilities and ensure long-term financial stability.

Conclusion:

Composite licensing offers an opportunity to streamline operations and improve the accessibility and affordability of the insurance sector. Drawing from the successful models of Singapore and the Philippines, India can design a framework that balances flexibility with financial safeguards. A well-crafted composite licensing framework can not only increase insurance penetration but also strengthen consumer confidence, ensuring a more resilient financial system.