IRDAI should fast-track risk-based capital framework; GST on insurance needs rationalisation: Parliamentary panel
A parliamentary committee report recommended that the Insurance Regulatory and Development Authority of India (IRDAI) fast-track implementation of the Risk-Based Capital (RBC) framework
The Committee flagged that the 18% GST rate on certain insurance products has adversely affected affordability and insurance penetration, and recommended the government examine rationalisation
The report expressed concern over the declining market share of public sector insurers and the weak financial health of some general insurers, recommending solvency restoration plans
The Committee recommended that the Department of Financial Services and IRDAI set time-bound annual targets for raising both life and non-life insurance penetration, in view of the "Insurance for All by 2047" goal
Risk-Based Capital (RBC) Framework — Move Away from Factor-Based Solvency
India's current insurance solvency regime is a simple factor-based model under Section 64VA of the Insurance Act, 1938, requiring insurers to maintain an Available Solvency Margin at least 1.5 times the Required Solvency Margin (a 150% control level), applied uniformly regardless of an insurer's actual risk profile. IRDAI has been working toward replacing this with a Risk-Based Capital framework that ties capital requirements to each insurer's specific risk exposure.
Key Details
- Current regime: uniform 150% solvency margin control level under Section 64VA of the Insurance Act, 1938, irrespective of the individual insurer's asset-liability risk profile
- RBC framework: capital requirement varies with actual underwriting, market, credit, and operational risk exposure of each insurer — similar in principle to Basel-style risk-weighted capital norms in banking
- IRDAI has been developing the RBC roadmap over several years through committees and discussion papers, with a phased three-year implementation timeline proposed at various stages
- Global context: most mature insurance markets (EU's Solvency II, for instance) already use risk-based capital regimes rather than flat solvency ratios
The Committee's push to "fast-track" RBC implementation reflects concern that the delay in moving to a risk-sensitive framework is masking the weak financial health of some insurers — a factor-based flat ratio can look adequate on paper while actual risk exposure is much higher.
GST on Insurance Products — Recent Rationalisation
GST on insurance premiums has been a live policy issue; the GST Council reduced GST on individual life and health insurance policies from 18% to zero, effective 22 September 2025, though group insurance policies continue to attract 18% GST.
Key Details
- GST Council decision (3 September 2025): exempted all individual life insurance and individual health insurance policies (including family floater plans and reinsurance of the same) from GST, effective 22 September 2025
- Group insurance policies (e.g., employer-sponsored group health/life cover) remain taxed at 18% GST
- The Committee's recommendation to examine GST rationalisation for health, term life, agricultural insurance, and reinsurance products "on priority" suggests continuing focus on residual categories — including group insurance and other products not yet covered by the 2025 exemption — as well as monitoring the affordability impact of the 2025 reform
- Objective cited: balancing the "Insurance for All by 2047" penetration goal with fiscal sustainability
While individual policies saw GST removed in September 2025, the Committee's continuing concern about the "18% GST on insurance products" affecting affordability points to categories still taxed at 18% (notably group insurance) and to monitoring whether the reform has meaningfully improved penetration.
Insurance Regulatory and Development Authority of India (IRDAI)
IRDAI is the statutory regulator for the insurance sector in India, established under the Insurance Regulatory and Development Authority Act, 1999, following the recommendations of the Malhotra Committee (1994) on insurance sector reforms.
Key Details
- Established under the IRDA Act, 1999; headquartered in Hyderabad
- Regulates both life and non-life (general) insurers, along with reinsurers and insurance intermediaries
- India's insurance penetration (premium as a share of GDP) has historically been well below the global average, cited around 4.2% in recent years, prompting the "Insurance for All by 2047" mission
- Reports to the Ministry of Finance's Department of Financial Services (DFS), which is also named in the Committee's recommendation for setting penetration targets
IRDAI is the implementing authority for both recommendations in the report — it must operationalise the RBC framework and work with DFS on penetration targets, making it the central institutional actor the Committee is pressing to act faster.
Parliamentary Committee Oversight of Financial Regulators
Standing/departmental committees of Parliament examine the functioning of statutory regulators like IRDAI and table reports with recommendations, forming part of Parliament's oversight function over the executive and autonomous regulatory bodies.
Key Details
- Such committees typically comprise members from both Houses and examine budgetary demands, policy implementation, and regulatory performance of the ministries/departments and bodies under their remit
- Recommendations of parliamentary committees are not binding on the executive but carry significant persuasive and political weight, and government responses (Action Taken Reports) are typically required
- This distinguishes committee oversight from judicial review or CAG audit — it is a legislative check operating through scrutiny and recommendation rather than binding directive
The report's recommendations on RBC and GST rationalisation are advisory in nature; whether IRDAI and the GST Council act on them depends on the executive's response, illustrating the limits and nature of parliamentary committee oversight over financial regulators.
- Current solvency control level under Section 64VA, Insurance Act, 1938: 150% (Available Solvency Margin ≥ 1.5x Required Solvency Margin)
- GST on individual life and health insurance policies: reduced from 18% to 0%, effective 22 September 2025 (GST Council decision, 3 September 2025)
- GST on group insurance policies: continues at 18%
- India's insurance penetration: cited around 4.2% of GDP in recent years, below the global average
- Government mission: "Insurance for All by 2047"
- IRDAI established under the IRDA Act, 1999; headquartered in Hyderabad