The Insurance Act, 1938 (“Insurance Act”), includes special provisions obligating insurers to mandatorily source a part of their business from persons residing in rural areas; workers in the unorganised or informal sector, or from economically vulnerable or backward classes of the society.[1] Insurers are also required to underwrite a minimum percentage of insurance business for third-party motor insurance policies, both under the Insurance Act[2] as well as the Motor Vehicles Act, 1988 (“MV Act”).[3] These requirements were, until recently, implemented through two distinct regulations issued by the Insurance Regulatory and Development Authority of India (“IRDAI”) – the IRDAI (Obligation of Insurer to Rural and Social sector) Regulations, 2015 (“RSO Regulations”), and the IRDAI (Obligation of Insurer in Respect of Motor Third Party Insurance Business) Regulations, 2015 (“MTP Regulations”).
Pursuant to the IRDAI’s initiative to consolidate and simplify insurance regulations to make them principle based, the RSO Regulations and the MTP Regulations have been unified into the IRDAI (Rural, Social Sector and Motor Third-Party Obligations) Regulations, 2024 (“Consolidated Regulations”), which the IRDAI notified on March 20, 2024, along with the Master Circular on Rural, Social Sector and Motor Third-Party Obligations, 2024 (“Master Circular”) issued on May 10, 2024.
The new regime has been in operation for more than 6 (six) months, and the following is a snapshot of (1) the key changes introduced in the Consolidated Regulations, (2) changes in the obligations of insurers, and (3) our takeaways.
The key changes introduced in the Consolidated Regulations
| Modification of the definition of “rural sector” | The RSO Regulations classified “rural sector” based on the census of India. The modified definition under the Consolidated Regulations includes areas administered under gram panchayats,[4] constituted by the State Governments.[5] The change aims to enhance administrative convenience and better implementation of the obligations. Insurers are also required to work in close coordination with the Gram Sarpanch and Gram Sachiv for meeting their obligations, bridging last-mile connectivity with rural areas. |
| Modification of the definition of “social sector” | The ambit of “social sector” has been increased by modifying the definition of“unorganised sector” as per the Unorganised Workers Social Security Act, 2008.[6] “Social sector” now includes “enterprises” owned by individuals employing less than 10 workers, in addition to various categories of self-employed workers included under the previous regime. The updated definition of “Other categories of persons”under the “social sector” defines “persons with disability” in line with the Rights of Persons with Disabilities Act, 2016.[7] The modified definition of the term “lives” means human lives insured, irrespective of whether they were newly insured during the financial year, or not.[8] |
| Inclusion of Government schemes | Insurers may now fulfil their rural and social sector obligations through policies pertaining to government social security schemes where the Government pays total/partial premium with/without any contribution from the members/beneficiaries covered.[9] The previous RSO Regulations had excluded schemes where the Government has paid total premium.[10] It is clarified that insurance policies issued to beneficiaries of government schemes, including but not limited to, PM Kisan Samman Nidhi Yojana, eShram cardholders, various Direct Benefit Transfer schemes, etc., would now be counted towards social sector obligation.[11] Previously, such a special carve-out only pertained to crop insurance, wherein the lives of individual beneficiaries/farmers covered could be considered towards fulfilment of social sector obligations.[12] |
| Achieving complete saturation | The Consolidated Regulations state that while minimum compliance has been prescribed, insurers are advised to achieve “complete saturation” of the gram panchayats in terms of lives, dwellings, shops, and vehicles insured under life, fire, and motor insurance, respectively.[13] Insurers are additionally incentivised with suitable “rewards” (in a manner determined by the competent authority) for achieving higher than the prescribed minimum obligations and increasing the spread of insurance.[14] |
| Enhanced role of Councils | The Master Circular requires the Life Insurance Council and the General Insurance Council (representative bodies of life and general insurers, respectively, collectively addressed herein as “Councils”) to ensure adequate coverage of gram panchayats towards the fulfilment of rural and social sector obligations, in all states and Union Territories, to ensure even spread of coverage pan India.[15] The General Insurance Council and the insurers are also tasked with identifying the uninsured vehicles in engagement with the Insurance Information Bureau[16] and state roads & transport authorities under the Consolidated Regulations for fulfilling their motor third-party obligations.[17] |
| Self-certification for social sector | The Consolidated Regulations permit self-certification of profession by prospects supported by appropriate proofs (photographs etc.), which would now suffice as a proof of identify for the social sector in the absence of a government-backed identity card.[18] However, such instances should not exceed 20 per cent of the insurer’s total social sector obligations for the financial year.[19] |
Changes in the obligations of insurers
The Consolidated Regulations have brought in significant changes in the obligations of insurers, as listed subsequently. The obligations are only applicable for the first year after notification of the Consolidated Regulations, i.e., FY 2024–25. Thereafter, basis experience in the first year, the IRDAI will specify obligations for the future.
Rural sector
With the introduction of a collective threshold, insurers must now collectively insure a minimum of 25,000 gram panchayats to meet their rural sector obligations.[20] The Councils must identify the gram panchayats for fulfilling the obligations and indicate the minimum number of gram panchayats to each insurer based on mutually agreed parameters.[21] Thereafter, insurers must identify their target gram panchayats in the States of their choice,[22] ensuring no two insurers are allocated the same gram panchayat.[23]
The Consolidated Regulations clearly specify the minimum number of gram panchayats life, general, and health insurers must cover. These also outline the minimum percentage of lives in a gram panchayat that life insurers must cover; the minimum percentage that general insurers must cover in a gram panchayat with regard to dwellings and shops, and vehicles under motor insurance; and the minimum percentage of lives in a gram panchayat that health insurers must cover under health insurance and personal accident insurance. The detailed obligations for the rural sector under the Consolidated Regulations can be accessed here. The RSO Regulations, on the other hand, had specified the percentage of number of policies in case of life insurers and the percentage of gross premium written to be covered in rural areas in case of general insurers and health insurers. The detailed obligations under the RSO Regulations can be accessed here.
The manner of fulfilment of obligations under the RSO Regulations could have led to the obligations being fulfilled only in specific rural areas without ensuring a more uniform spread, which has now been addressed through the change in criteria in the present regime. Considering there are only about 2,50,000 gram panchayats in India as per publicly available data,[24] all gram panchayats could be covered over the next few years even at the current rate of 25,000 gram panchayats per year.
Social sector
While the RSO Regulations specified social-sector obligations for all insurers (life, general, and standalone health) based on the percentage of social sector lives computed on the total business procured in the preceding financial year, the Consolidated Regulations specify social-sector obligations based on the minimum percentage of lives to be covered as a proportion of total lives covered. The detailed social-sector obligations under the Consolidated Regulations can be accessed here and those under the RSO Regulations can be accessed here.
Under the Consolidated Regulations, all insurers must cover a minimum of 10 per cent of social sector lives as a proportion of total lives covered, irrespective of the insurer’s age. Further, just as for the rural sector, the Councils must collate data for the social sector population and share it with the insurers.[25] Thus, the Consolidated Regulations intend to widen the ambit of “social sector” and increase the social sector obligations of insurers. Compliance challenges are expected in the implementation of the obligations, especially due to the limitation on cases that require the self-certification of social sector prospects.
Motor Third Party
Under the MTP Regulations, the obligations to underwrite motor third-party risks for a financial year was calculated based on a prescribed formula, factoring in various parameters such as market share and gross direct premium income,[26] which was evolved based on past experiences. The intent was to ensure equitable distribution of responsibility under the regulations.
The Consolidated Regulations impose obligations on general insurers to increase the number of goods-carrying and passenger-carrying vehicles and tractors (miscellaneous segment) by a certain minimum percentage based on the motor third-party insurance market share during the previous financial year.[27] During their initial years of operations, new insurers underwriting motor insurance will have no exemption.[28] Further, all general insurers must also ensure a minimum threshold of cover, i.e., 5,000 goods-carrying vehicles, 5,000 passenger-carrying vehicles, and 1,000 tractors (miscellaneous segment).[29] The current regime has fixed the obligations on the incremental numbers of vehicles or lives, as can be accessed here, rather than as a percentage of premium or policies under the previous regime, which can be accessed here.
3. Our takeaways
The Consolidated Regulations are an attempt to increase the spread of insurance across the country – elaborating the manner for carrying out the obligations; increasing the ambit of beneficiaries under the social sector; incentivizing insurers to meet greater coverage than specified in the obligations; and shifting from policy-based and premium-based calculations to calculations based on practical and realistic parameters.
The obligations, implemented on a pilot basis for FY 2024–25 to gauge and ensure a smooth transition to the new framework, will enable the IRDAI to set realistic obligations in the future financial years.[30] Considering the changes to the obligations under the new regime, the Consolidated Regulations, if implemented in the intended manner, could assist insurers and the industry to bridge gaps and increase the spread of insurance, and consequently, forge a path towards “Insurance for All” by 2047, as the IRDAI had noted in the Annual Report 2023–2024.[31] Given that insurers would have filed the half-yearly returns for rural social sector obligations, the progress on the Consolidated Regulations translating to better spread at the ground level is yet to be seen.
[1] The Insurance Act, 1938, Section 32B – Insurance business in rural and social sectors. – Every insurer shall, after the commencement of the Insurance Regulatory and Development Authority Act, 1999, undertake such percentages of life insurance business and general insurance business in the rural and social sectors, as may by specified, in the Official Gazette by the Authority, in this behalf.
The Insurance Act, 1938, Section 32C – Obligations of insurer in respect of rural or unorganised sector and backward classes. – Every insurer shall, after the commencement of the Insurance Regulatory and Development Authority Act, 1999, discharge the obligations specified under section 32B to provide life insurance or general insurance policies to the persons residing in the rural sector, workers in the unorganised or informal sector or for economically vulnerable or backward classes of the society and other categories of persons as may specified by regulations made by the Authority and such insurance policies shall include insurance for crops.
[2] The Insurance Act, 1938, Section 32D – Obligation of insurer in respect of insurance business in third party risks of motor vehicles. – Every insurer carrying on general insurance business shall, after the commencement of the Insurance Laws (Amendment) Act, 2015 (5 of 2015), underwrite such minimum percentage of insurance business in third party risks of motor vehicles as may be specified by the regulations:
Provided that the Authority may, by regulations, exempt any insurer who is primarily engaged in the business of health, re-insurance, agriculture, export credit guarantee, from the application of this section.
[3] The Motor Vehicles Act, 1988, Section 146
[4] Consolidated Regulations, Regulation 3(1)(i).
[5] Consolidated Regulations, Regulation 3(1)(e).
[6] Consolidated Regulations, Regulations 3(1)(j) and 3(1)(k).
[7] Consolidated Regulations, Regulation 3(1)(h).
[8] Consolidated Regulations, Regulation 5(a).
[9] Consolidated Regulations, Regulation 5(b).
[10] RSO Regulations, Regulation 4.3.
[11] Consolidated Regulations, Regulation 5(c).
[12] RSO Regulations, Regulation 4.1.
[13] Master Circular, Clauses 3(a)(i), 3(b)(i) and 3(c)(i).
[14] Consolidated Regulations, Regulation 7(b).
[15] Master Circular, Clauses 3(a)(ii), 3(b)(ii) and 3(c)(ii).
[16] Insurance Information Bureau is a body promoted by the IRDAI to fill the need for a sector–level data repository and analytics.
[17] Master Circular, Clause 8(b).
[18] Master Circular, Clause 7(b).
[19] Master Circular, Clause 7(b).
[20] Consolidated Regulations, Regulation 4(A).
[21] Master Circular, Clauses 3(a)(ii), 3(b)(ii) and 3(c)(ii).
[22] Master Circular, Clauses 3(a)(iii), 3(b)(iii) and 3(c)(iii).
[23] Master Circular, Clauses 3(a)(iii), 3(b)(iii) and 3(c)(iii).
[24] Local Government Directory, Ministry of Panchayati Raj <https://lgdirectory.gov.in/reportonStatewiseEntityDetails.do?OWASP_CSRFTOKEN=E89A-RDDM-3ZVN-52B1-0JXV-P4B4-BVMT-SXT5> accessed Sep 29, 2024.
[25] Master Circular, Clause 7(b).
[26] MTP Regulations, Regulation 3.
[27] Consolidated Regulations, Regulation 6(a).
[28] MTP Regulations, Regulation 4.
[29] Consolidated Regulations, Regulation 6(c).
[30] Consolidated Regulations, Regulation 7(c).
[31] IRDAI, Annual Report 2023–2024, page 279.
