Introducing Regulatory Sandbox in Insurance


Insurance sector in India has witnessed many changes and reforms since 2000. Be it, opening the market for private players in 2000, Foreign Direct Investment (FDI) upto 26% in 2000, detariffing in 2007, allowing foreign reinsurers to open their branch offices in 2015, FDI upto 49% in 2015 etc.  These measures did had positive impact in the industry as a whole and one of the coming reform measures which Insurance Regulatory and Development Authority of India (IRDAI) has proposed is of Regulatory Sandbox in Insurance. This post will be discussing about the proposed Regulatory Sandbox.

IRDAI will be coming up with a separate regulation for the regulatory sandbox in insurance and draft of this regulation has been already published and once published in the Gazette of India after necessary changes if required will come into force and will be known as IRDAI (Regulatory Sandbox) Regulations, 2019.  There are two important terms which requires attention to understand what this proposed regulation is all about and what will be its impact in the insurance sector. These two terms are:

  • Regulatory Sanbox: This means an environment used in the financial service sector, which provides testing ground for new business models and applications that may not necessarily be covered fully by or fully compliant with existing regulations. Let’s understand this in simple terms. Insurance is a highly regulated sector and there is much regulatory compliance which needs to be followed in this market. Regulations are there in every step in insurance. What regulatory sandbox says is that it will be providing and environment for testing of new business models which will not require being fully compliant with the existing regulations. Having said that, this means insurance company can come up with new products and business models with relaxation in terms of being fully compliant with the existing regulations.
  • Sanbox Environment: This means a testing environment designed for experimentation for a specific period of time. Regulatory Sandbox provides testing grounds for new business with relaxation from being fully compliant and Sandbox environment gives the testing environment to experiment for specified period of time. Let’s understand this with a simple example. Suppose an insurance company had developed a new product covering those risks which are normally excluded. Product development requires many regulatory clearances but since the company has developed this product with the provisions of Regulatory Sandbox, all the regulations need not to be complied. As the insurance company had developed a new product, they require seeing how the product will perform and for that they need to experiment with the newly developed product which can be accomplished by Sandbox Environment which provides the ground for doing experiment. Regulatory Sandbox gave the opportunity to develop new product with relaxation in being fully complied with the regulations and Sanbox Environment gave the testing platform for the newly developed product.

As it can be inferred from the above discussion, the whole idea of Regulatory Sandbox is to allow insurance industry to come up with the new ideas, innovation, business models etc. with relaxation with existing regulations while keeping the interest of policyholder’s intact. An applicant may apply to the Authority seeking permission for promoting or implementing innovation in insurance in India in any one or more of the following categories:

  1. Insurance Solicitation or Distribution
  2. Insurance Products
  3. Underwriting
  4. Policy and Claims Servicing
  5. Any other category recognised by the Authority.

The application shall be accompanied by a non-refundable processing fee of rupees ten thousand plus applicable taxes. IRDAI will verify the application and once satisfied with the application can grant permission for the period of 6 months. However, extension can be granted if required but not more than for 6 months. This means, the applicant has to complete the task in six months and if granted extension, maximum one year. IRDAI will review the progress at periodical intervals.

On completion of the allocated time period or size of the proposal specified, the Applicant shall submit a report to the Authority within 15 days on how the proposal met the objectives along-with feedback from the policyholders. The applicant shall also submit a plan of action as to how to enable the proposal to be brought under regular regulatory supervision. On examining the report submitted by the applicant, IRDAI may grant permission to the applicant to adopt the proposal under regular regulatory supervision wherein in addition to provisions of Insurance Act, 1938, IRDA Act, 1999 all regulations, guidelines, circulars, etc will be applicable from the date of moving to regular regulatory supervision.

In brief, the introduction of Regulatory Sanbox allows the insurance industry to come up with new innovations in insurance with relaxation of from existing regulations for maximum period of one year. Once the performance of the proposal is up to the mark or meets the objectives as expected it can be converted into the normal regulatory supervision. Since there are provisions for regulatory relaxation and hence, regulatory sandbox can be considered as a good move for the innovation in insurance industry. Not only this, it will also allow to do experiment in untested areas of insurance which will also promote research and innovation in insurance sector in India.

What are your thoughts on this introduction of Regulatory Sandbox in insurance? Do share your views.

– Ashish Kumar

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Understanding Insurance Penetration


Two of the most important and mostly used terminologies in insurance industry throughout the globe are insurance penetration and insurance density. In fact, these two are also used to compare the insurance industry of various countries and plays an important parameter for judging the insurance growth in any economy. In this post, I will discuss about Insurance penetration and will try to a make readers understand about the same and will be discussing Insurance density in a separate post.

Insurance Penetration: Technically, Insurance Penetration is the ration of premium underwritten in a particular year to the Gross Domestic Product (GDP) of the country and is expressed as a percentage. In other words, insurance penetration is the percentage contribution of the insurance sector to the GDP of the country. Let us understand with an example. Suppose the total premium underwritten in a Financial Year in a country is INR 1,00,00,000 and the GDP of the country of that Financial Year is INR 50,00,00,000. To calculate the insurance penetration, divide the premium underwritten to the GDP which means, (1,00,00,000/50,00,00,000 = 0.02) and expressing this as a percentage will come up to 2% (0.02*100 = 2). This means, the insurance penetration is 2%. Insurance Penetration is widely used and you will encounter this jargon in almost every insurance journals, reports, research papers etc.

As per the latest Insurance Regulatory and Development Authority of India (IRDAI) Annual Report 2017-18, the insurance penetration of India in 2017 was 3.69% which is a slight increase from 3.49% in 2016. Further, the insurance penetration can be segregated in to life insurance and non-life insurance. As per IRDAI Annual Report, the life insurance penetration and non-life insurance penetration of India in 2017-18 were 2.76% and 0.93% respectively.  For 2016-17, life insurance penetration and non-life insurance penetration were 2.72% and 0.72% respectively. This indicates a marginal increase in life insurance and non-life insurance penetration from 2016-17 to 2017-18. Let’s look at the insurance penetration of some of the countries which is given in the following table:

Insurance Penetration of selected countries (in %)
Country Year 2016 Year 2017
Life Non-Life Total Life Non-Life Total
Taiwan 16.65 3.34 19.99 17.89 3.42 21.32
Hong Kong 16.2 1.41 17.6 14.58 3.36 17.94
South Africa 11.52 2.74 14.27 11.02 2.74 13.75
South Korea 7.37 4.72 12.08 6.56 5 11.57
United Kingdom (UK) 7.58 2.58 10.16 7.22 2.36 9.58
France 6.06 3.17 9.23 5.77 3.18 8.95
Japan 7.15 2.37 9.51 6.26 2.34 8.59
Switzerland 4.72 4.12 8.85 4.41 4.12 8.53
Singapore 5.48 1.67 7.15 6.64 1.58 8.23
India 2.72 0.77 3.49 2.76 0.93 3.69
World 3.47 2.81 6.28 3.33 2.8 6.13
Source: Swiss Re, Sigma volumes, 3/2017and 3/2018

A closure look at the insurance penetration reveals that India is way behind the world average insurance penetration.  Taiwan is the country with highest insurance penetration of 21.32 % followed by Hong Kong and South Africa having insurance penetration of 17.94% and 13.75% respectively. Also, the above table reveals that Switzerland is the country where the gap between life and non-life insurance penetration is minimum. In fact, Switzerland has a proper distribution of life and non-life insurance business and both life and non-life insurance has almost equal contribution to the country’s GDP.

Insurance penetration is an indicator of growth of insurance sector for any economy in a particular year. It is widely used as a comparative tool to measure and compare insurance industry among various countries and hence knowing and understanding of insurance penetration is beneficial for all of us. Hope I was able to make you understand this jargon in simple terms. 🙂

Ashish Kumar

IRDAI (Reinsurance) Regulations, 2018


The Insurance Regulatory and Development Authority of India (IRDAI) came up with the reinsurance regulations recently in December 2018. This is a first kind of regulation of its type, specific to reinsurance repealing IRDAI (General Insurance – Reinsurance) Regulations and IRDAI (Life Insurance – Reinsurance) Regulations which were released in 2016. This regulation will be called as IRDAI (Reinsurance) Regulations, 2018 which will be effective from 1st January 2019. This article will provide some of the insights of this newly released regulation covering some of the basic terminologies, areas like Cross Border Reinsurer (CBR), cession limit, amendment to previous regulations etc.

There are total 12 regulations contained in IRDAI (Reinsurance) Regulations, 2018. Some of the important points which need to be known from these regulations are as follows:

  • Reinsurance Program: Every insurer need to have a reinsurance program with the objective of having maximum retention within the country. The Board approved reinsurance program need to be submitted to the IRDAI before 45 days of the commencement of the financial year. For any changes made to the reinsurance program, insurer need to submit the final board approved reinsurance program within 30 days of the commencement of the financial year. The reinsurance program along with the retention policy (discussed below) need to be submitted to the Authority i.e IRDAI. (Regulation 3)
  • Retention Policy: The first objective of reinsurance as stated in these regulations, is to maximize retention within the country. Keeping this objective in mind insurers need to formulate a retention policy. Every Indian insurer shall maintain the maximum possible retention in commensuration with its financial strength, quality of risks and volume of business ensuring that the reinsurance arrangement is not fronting. (Regulation 3). Life Insurer should maintain a minimum retention of
  1. 25% of sum at risk under pure protection life insurance business portfolio
  2. 50% of sum at risk under other than pure protection life insurance business portfolio

The retention policy also states that “Every Indian Reinsurer shall maintain a minimum retention of 50% of its Indian business”, as mentioned in Regulation 3(2)(C) .

  • Fronting: This is one of the confusing jargons used in reinsurance. Let us try to understand this with an example. An insurer is having motor portfolio and what it does is instead of keeping some portion of risks within itself, the insurer transfers most or all part of the risks to a reinsurer, thus relieving itself from the financial burden. This is an example of fronting. Insurer transferring most or all portion of risks to reinsurers. Generally, new insurers use fronting as a risk transfer tool in order to reduce their financial burden at the time of claims. Fronting is defined as a process of transferring risk in which an Indian Insurer cedes or retro-cedes most of or all of the assumed risk to a Re-insurer or retrocessionaire. (Regulation 2(13))
  • IIOs: IIOs is an acronym of International Financial Service Center (IFSC) Insurance Office. This means a branch office of an insurer or reinsurer domiciled in India or outside, which has been granted a certificate of registration by the Authority to set up its office in IFSC-SEZ, to transact insurance business or reinsurance business or both. IIO has been defined in Regulation 2(17) of these Regulations. This is a new concept which specifies setting up of offices in IFSC Special Economic Zone (SEZ).
  • Foreign Reinsurer Branch (FRB): This means a branch of a Foreign Reinsurer who has been granted certificate of registration by the Authority under the Insurance Regulatory and Development Authority of India (Registration and Operations of Branch Offices of Foreign Reinsurers other than Lloyd’s) Regulations, 2015 or Insurance Regulatory and Development Authority of India (Lloyd’s India) Regulations, 2016, as amended from time to time.

Cross Border Reinsurer (CBR)

CBR, as the name suggests, means a foreign reinsurers including Lloyd’s Syndicates, whose place of business is established outside India and which is supervised by its home country regulator. CBR includes:

  • Parent or Group companies of FRBs (Foreign Reinsurer Branch)
  • Parent or Group companies of IIOs.

CBR can be understood by an example. Consider an Indian insurer wants to transfer its risk to a reinsurer which is not in India but in United Kingdom (UK). Indian insurer can transfer its risk to UK based reinsurer whose place of business is in UK and not in India. Then the UK based reinsurer is a CBR. In order to transact business through CBRs, there are eligibility criteria which a CBR (like the UK based reinsurer) should have. Indian insurer can place their business through CBRs if CBRs meet the following eligibility criteria as defined in Regulation 4:

  • The CBR is an insurance or Re-insurance entity in its home country, duly authorized by its home country regulator to transact re-insurance business during the immediate past three continuous years;
  • The CBR has a credit rating of at least BBB from Standard & Poor or equivalent rating from an international rating agency during the immediate past three continuous years;
  • The home country of the CBR has signed Double Taxation Avoidance Agreement with India;
  • The CBR has minimum solvency margin or capital adequacy, as specified by the home country regulator, during the immediate past three continuous years;
  • The past claims settlement experience of the CBR is found to be satisfactory;
  • Any other requirements as stipulated by the Authority from time to time.

One of the most important aspects related to CBR is what is known as Cession Limits. Cession means transfer of risks and the insurance company which transfers the risks to a reinsurer is known as Cedant. Cession Limits restricts Indian insurer to transfer risks to CBRs based on the rating of CBRs. The rule is simple; better the rating of CBR, more risk can be transferred and vice-versa. The below table provides the maximum cession limit that can be allowed per CBR as defined in Regulation 6.

Rating of the CBR as per Standard & Poor or equivalent Maximum overall cession limits

allowed per CBR

Greater than A+ 20%
Greater than BBB+ and up to and including A+ 15%
BBB and BBB+ 10%
Note: The above percentages are to be calculated on the total reinsurance premium ceded out-side India.

Reinsurance Placements

Regulation 5 describes the way of placing reinsurance placements. According to Regulation 5(1), every insurer (Cedant) shall be free to obtain best terms for its reinsurance protection of domestic risks, subject to the following:

  • Cedants shall seek terms at least from all Indian Re-insurers, who have been transacting Re-insurance business (other than emanating from obligatory cession) during the immediate past three continuous years and at least from four FRBs. (Regulation 5(1)(A) )
  • No Cedant shall seek terms from IIOs and FRBs having credit rating below A- from Standard & Poor’s or equivalent rating from any other International Rating Agency. (Regulation 5(1)(B)(a) and Regulation 5(1)(B)(b) )

Order of Preference

One of the most important aspects of reinsurance placement in Indian context is Order of Preference which has been revised in IRDAI (Reinsurance) Regulations, 2018. Order of preference means in which order, the insurance company in India should place their reinsurance business. In simple terms, which reinsurers should be given preference while placing reinsurance business? As per Regulation 5(2)(A), every cedant shall offer best terms, for participation in the following order of preference:

  1. to Indian Re-insurers, transacting re-insurance business (other than emanating from obligatory cession) during the immediate past three continuous financial years;
  2. to other Indian Re-insurers and FRBs;
  3. to the IIO as under regulation 5(1)(B)(a) which provided the best and lead terms with capacity of not less than 10%;
  4. to the CBR as under regulation 5(1)(B)(b) which provided the best and lead terms with capacity of not less than 10%;
  5. to other IIOs;
  6. To other Indian Insurers (only Facultative) and CBRs.

A thorough look on the above order of preference interprets that the Indian insurers should give first preference to General Insurance Corporation of India, popularly known as GIC Re as it is the only Indian reinsurer transacting reinsurance business for the past consecutive three financial years.  Other Indian reinsurers and FRBs come at second preference followed by IIOs and CBRs.

Reinsurance placements and order of preference as defined in Regulation 5(1) and Regulation 5(2) are not applicable to the following as defined in Regulation 5(3)

  1. Retrocession or reinsurance placements of Indian Re-insurers, FRBs, IIOs and Insurance Pools;
  2. Existing inter-company arrangements of the Indian Insurers transacting direct insurance business;
  3. Obligatory cessions as notified from time to time under Section 101A of the Act;
  4. Re-insurance placements of Indian insurers transacting life insurance business. However, Indian insurers,transacting life insurance business, shall endeavor to utilize the Indian domestic capacity before offering to the CBRs.

Alternative Risk Transfer (ART) and Domestic Insurance Pool

Insurer can initiate the proposal for an insurance pool which needs to be approved by the IRDAI as defined in Regulation 7. IRDAI approval is required for the formation of domestic insurance pool.

As far as Alternative Risk Transfer (ART) is concerned, there is a provision for ART solutions for Indian insurers as per Regulation 8. Insurers intending to adopt ART solutions need to submit their proposal to the IRDAI and after examining various aspects, IRDAI may grant permission to adopt ART solutions. IRDAI approval is required for adopting ART solutions.

What’s new in IRDAI (Reinsurance) Regulations, 2018

After having a walk through on IRDAI (Reinsurance) Regulations, 2018, let us see what is new in these regulations which are mentioned below:

  • Order of preference revised.
  • Order of preference not applicable for life insurers.
  • Every Indian Reinsurer shall maintain a minimum retention of 50% of its Indian business.
  • Amendment to Regulation 4 of IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurance Other than Llyod’s) Regulations, 2015 which has been changed to, An applicant shall make a requisition for registration application under for Re-insurance business wherein the branch office of foreign Re-insurer shall maintain a minimum retention of 50% of the Indian Re-insurance business.”
  • For FRBs, there is no category as such now. The minimum retention is 50%. An applicant shall make a requisition for registration application for Re-insurance business wherein the branch office of foreign Re-insurer shall maintain a minimum retention of 50% of the Indian Re-insurance business. This removes Category B (minimum retention of 30%) of IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurance Other than Llyod’s) Regulations, 2015.
  • Amendment to Regulation 8 of IRDAI (Llyod’s India) Regulations, 2016 which has been changed as, “An applicant shall make a requisition for registration application for Re-insurance business wherein the Lloyd’s India Syndicate shall maintain a minimum retention of 50% of the Indian Re-insurance business.”
  • Provision for Alternate Risk Transfer (ART).

I have attached the IRDAI (Reinsurance) Regulations, 2018 below. One can download the regulation for their reference.

IRDAI (Reinsurance) Regulations 2018

Ashish Kumar

Insurance Terminologies – III


In this 3rd installment of Insurance Terminologies series, let’s look at couple of the jargons which comes across during health insurance purchase or claims.

  • Cumulative Bonus: Cumulative Bonus, as the name suggests, is an increase in the sum insured for the claim free year. This terminology is used in health insurance. This means if the customer has not made any claim for an year, there will be a percentage increase in sum insured which is generally 5% to 10% and can also range from 10% to 50% which varies from insurer to insurer. The maximum bonus given is 50%. One important thing to be noted is that the cumulative bonus is provided on the basic sum insured. For example, if the basic sum insured is INR 100000 and there is no claim made by the customer, the sum insured will be increased by 10% at the time of renewal and hence the new sum insured becomes INR 110000 for the next year. If no claim is reported again in the subsequent year, the cumulative bonus of 10% (10% of 100000=10000) will be provided and the total sum insured will become INR 120000 ( 110000+10000= 120000). As you can see cumulative bonus is calculated on basic sum insured which is INR 100000 in the given example and it is accumulated for every claim free year. The cumulative bonus is added to the sum insured of preceding year which becomes the new sum insured for subsequent year (110000+10000= 120000).
  • Waiting period: Waiting period is the duration for which the coverage is not provided. Health insurance policies have waiting period of 30-60 days. This means any claim made during this period is not payable even though if the loss occurred due to the risks covered in the policy. Any claim made post waiting period is payable provided the loss would have occurred due to the perils covered in the policy. One important point to be noted is that for pre-existing disease, waiting period is 48 months (4 years). Pre-existing diseases are covered after 4 years from the inception of the policy.

Ashish Kumar

Insurance Terminologies – II


I started this series of posts related to the terminologies used in insurance. In this second installment, let us know few of them which is discussed below.

  • Premium: It is the consideration that one pays in monetary value for buying the insurance policy. The money paid by you to purchase the insurance policy is known as the premium. As per Section 64VB of Indian Insurance Act 1938, premium should be paid in advance before the risk coverage starts. Hence, no coverage will be provided before paying the premium.
  • Indemnity: Indemnity means bringing back to the same financial condition as if the loss didn’t occurred. This is one of the basic principles of insurance which states that there should be no benefit out of the coverage. Meaning that if the person suffers a loss of INR 10000 due to the peril covered in the policy, the insurance company will pay only the amount of loss i.e INR 10000 and not more than that even though the policy cover is of greater value say INR 100000. The amount paid by the insurance company is subject to the total amount covered in the policy. This principle is applicable in general insurance while in life insurance, principle of indemnity is not applicable.
  • Endorsement: This means any alterations or modifications in the insurance policy. Endorsement can be financial or non financial. Financial endorsement includes change in the sum insured, change in premium etc. Non-financial endorsement endorsement includes change in address, change of contact details, email id etc. A written application by the policyholder has to be given to the insurance company for any endorsement.

Ashish Kumar

Insurance Terminologies – I


I have decided to start a new series of post containing various terminologies related to insurance which one can come across in dealing with insurance related matters. This is the first installment of this series. I will keep things simple and straightforward so that any one reading the post can understand. I will not cover too much terminology in one post. Each post will contain three to five terminologies. This may also be helpful to those pursuing or willing to pursue their study in insurance. So let’s start.

  • Insured: Insured is the person who has taken the insurance policy. The other word which is synonymous to this is the policyholder. Both are synonymous to each other. Suppose, if you have taken a life insurance policy, then you are the insured or the policyholder.
  • Insurer: This is the insurance company which provides you the insurance. The company providing life insurance is known as life insurer and the company providing non-life insurance is known as non-life or general insurer. Some of the insurers in India are LIC of India, ICICI Lombard, SBI Life Insurance, SBI General Insurance, HDFC Ergo General Insurance, Bajaj Allianz General Insurance, PNB Metlife etc.
  • Beneficiary: This is the individual who will receive payment due to annuity, life insurance policy etc. Nominee is an example of beneficiary who receives the payment on the event of insured death.

Ashish Kumar

About IRDAI


The insurance industry in India is regulated by Insurance Regulatory and Development Authority of India (IRDAI), headquartered at Hyderabad. IRDAI was formed by an Act of Parliament in 1999. The IRDA Act, 1999 paved the way for the formation of IRDAI. The history goes back to the recommendations of Malhotra Committee where the need for a regulator for insurance sector was suggested. Being the regulator IRDAI carries various functions like:

  • Protecting policyholder’s interest.
  • Granting of license to insurers, brokers etc.
  • Renew, modify, suspend, and cancel the registration.
  • Promoting efficiency in the conduct of insurance business.
  • Regulating investment funds by insurance companies.
  • Regulating maintenance of margins of solvency etc.

Apart from Hyderabad where it is headquartered, the Authority also has office in New Delhi and Mumbai. The composition of Authority as defined in Section 4 of IRDA Act, 1999 consists of 10 members which comprise of the following:

  • A Chairman
  • Five whole time members
  • 4 part-time members.

All the members are appointed by Government of India.

IRDAI is the regulating all forms of insurance except pension funds and postal insurance. Pension fund is regulated by Pension Fund Regulatory and Development Authority (PFRDA). Postal insurance include Postal Life Insurance (PLI) and Rural Postal Life Insurance (RPLI).

One of the reform measures initiated by IRDAI for general insurance industry came in 2007 when general insurers were allowed to price the premium accordingly. Prior to that, premium pricing was decided by Tariff Advisory Committee (TAC). Hence this is also known detariffing where general insurers are now allowed to decide the price of the premium. General insurers are allowed to decide the premium price to all forms of insurance except motor third party liability where the premium price is decided by IRDAI.

IRDAI is also the promoter of the following organizations:

  • Institute of Insurance and Risk Management (IIRM), Hyderabad: IIRM Hyderabad was established jointly by IRDAI and Government of Telangana in 2002. The institute provides quality education in insurance, risk management, Financial services, Acturial Science etc. The institute provides 1 year International Post Graduate Diploma (IPGD) and two year full time masters i.e Post Graduate Diploma in Management (PGDM). It is one of the rare institutes in the country providing MBA in insurance and related fields. The insurance course is accredited by Chartered Insurance Institute (CII), London and Insurance Institute of India (III), Mumbai. This is a good platform for those who wish to build their carrier in insurance.
  • Insurance Information Bureau of India (IIB): IIB was promoted by IRDAI in 2009 with the participation of stakeholders from insurance sector, with the objective of supporting the insurance industry with sector-level data to enable data based and scientific decision making including pricing and framing of business strategies.

This was a brief introduction about IRDAI and I hope it will be informative. I will be coming up with various other topics related to insurance from time to time. Stay tuned.

– Ashish Kumar