Introduction

The Union Cabinet has approved the Insurance Laws (Amendment) Bill, 2025 to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956, and the IRDAI Act, 1999. The Bill seeks to modernise regulation, attract global capital, strengthen insurer solvency, and improve consumer protection. However, dilution or exclusion of critical reforms, such as composite licensing, has limited its transformative potential.

Why in the News?

The Bill proposes raising the Foreign Direct Investment (FDI) limit in insurance companies from 74% to 100% for the first time. This represents a decisive shift from partial foreign ownership to full foreign control in a strategically sensitive financial sector. 

Core Reforms Introduced by the Bill

Foreign Capital Liberalisation

1. FDI expansion: Raises foreign ownership limit from 74% to 100%, enabling complete foreign control.
2. Capital inflow facilitation: Enables insurers to access long-term global capital for solvency strengthening.
3. Operational impact: Supports advanced underwriting, digital claims processing, and risk analytics.

Regulatory Powers and Enforcement

1. Enhanced IRDAI authority: Expands powers to impose penalties, recover illegal gains, and regulate intermediaries.
2. Punitive alignment: Brings enforcement powers closer to SEBI-style regulatory deterrence.
3. Market discipline: Ensures compliance through predictable penalty criteria.

Operational Flexibility for Insurers

1. LIC expansion: Permits LIC to enter new lines of business without prior government approval.
2. Administrative efficiency: Reduces approval delays and improves market responsiveness.
3. Global alignment: Enables LIC to align with regulatory norms of international markets.

Capital and Solvency Norm Reforms

1. Reduced capital threshold: Lowers minimum paid-up capital for new insurers.
2. Risk-based approach: Facilitates entry of niche and region-specific insurers.
3. Competition enhancement: Encourages diversification in products and pricing.

Reinsurance and Risk Distribution

1. Lower retention limits: Reduces compulsory retention of premium within India.
2. Global reinsurance access: Facilitates risk diversification through international reinsurers.
3. Market depth: Broadens reinsurance participation in catastrophe and health insurance.

Key Proposals Missing or Diluted

Composite Licensing Exclusion

1. Licensing rigidity: Retains separation between life and general insurance businesses.
2. Cost inefficiency: Prevents bundled insurance products under a single entity.
3. Global mismatch: Diverges from international insurance market practices.

Captive Insurance Silence

1. Regulatory omission: No provision for captive insurers despite global demand.
2. Corporate disadvantage: Limits cost optimisation for large firms managing complex risks.
3. Missed competitiveness: Reduces India’s attractiveness as an insurance domicile.

Product and Distribution Constraints

1. Limited cross-selling: Restricts insurers from offering mutual funds, loans, or credit cards.
2. Revenue limitation: Constrains diversification of income streams.
3. Consumer integration gap: Prevents one-stop financial service platforms.

Sectoral Impact Assessment

Insurance Market Structure

1. Market expansion: Likely entry of foreign insurers and niche domestic players.
2. Competitive pressure: Improves product variety and pricing efficiency.

Policyholder Outcomes

1. Service quality: Enhances claims efficiency and underwriting sophistication.
2. Coverage expansion: Supports insurance access for underserved populations.

Regulatory Architecture

1. Stronger oversight: Reinforces IRDAI’s supervisory role.
2. Structural incompleteness: Retains fragmentation in licensing and product design.

Conclusion

The Insurance Laws (Amendment) Bill, 2025 advances liberalisation through higher FDI limits, enhanced regulatory powers, and greater operational flexibility, strengthening capital availability and market efficiency in the insurance sector. However, the absence of deeper structural reforms, such as composite licensing and integrated regulation, limits its transformative impact, underscoring the need for a coherent, convergence-oriented regulatory framework to support long-term financial sector stability and inclusion.

PYQ Relevance

[UPSC 2013] The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA.

Linkage: The Insurance Laws (Amendment) Bill, 2025 expands and diversifies insurance products, increasing overlap with capital market instruments regulated by SEBI. This directly aligns with the UPSC question examining whether such product convergence justifies closer coordination or merger of SEBI and IRDAI to address regulatory fragmentation.

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